Global Crisis Prompts Brazil to Inject Another US$ 10 Billion in Economy

IbovespaIn order to  provide banks with more liquidity for loans to their clients Brazil's Central Bank (BC) announced Wednesday night, October 8, two additional adjustments to the rules of the compulsory deposits that Brazilian banks are required to keep with Brazil's monetary authority.

These actions should add another 23.2 billion reais (US$ 10 billion) to the Brazilian economy, with the first installment of 16.9 billion reais (US$ 7.3 billion) coming this Friday, October 10 and the remaining 6.3 billion reais (US$ 2.7 billion) early next week.

The measures occurred the same day in which six of the world main central banks decided, as an emergency step, to reduce their interest rates and thus lower the cost of money and improve consumption.

The first measure increases the financial institutions' deduction over compulsory deposits from 300 million reais (US$ 130 million) to 700 million reais (US$ 302 million) for financial institution. This action should bring 6,3 billion reais (US$ 2.7 billion) in the economy this coming Monday, according to the Central Bank's forecast.

The other measure has to do with the additional tariff of 8% over the compulsory deposits on cash or term deposits. Currently the regular aliquot for compulsory cash deposits is 45% and, for term deposits 15%. An additional 8% is charged over these amounts.

This 8% addition will be reduced to 5% starting Friday, according to the BC, allowing the release of another 16.9 billion reais (US$ 7.3 billion). The compulsory over the savings will remain at 10%.

According to the BC, this is the third alteration in the rules of the compulsory deposit since the aggravation of the international financial crisis. The whole of these changes should amount to 60 billion reais (US$ 26 billion) for the banks. Before the alterations, the BC was retaining 259.4 billion reais (US$ 112 billion) in compulsory deposits from banks.

In times of short supply of credit, as is the case now, the BC reduces this deposit increasing the available money. This Wednesday was also very unstable on the exchange rate market front, forcing the BC to use a heavy hand and intervene in the most forceful way since the beginning of this latest crisis.

It was the first time in five years that the Brazilian Central Bank sold dollars from its reserve to contain the exchange rate's escalade, holding three auctions between 10:43 am and 11:29 am, in addition to a swap auction between 14:30 pm and 14:45 pm , which had been planned the previous day.

The American currency price oscillated between 2.480 reais to 2.177 reais per dollar, finishing the day at 2.280 reais, a 1.34% decline.

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