With 200% Credit Card Interest Rates Brazil Bracing for 12.5% Prime Rate

Brazilian currency, the realThe Brazilian Central Bank’s Monetary Policy Committee (Copom), which sets the country’s basic interest rate (Selic), begins its fifth meeting of 2011 today. At the moment, Brazil’s Selic is 12.25% per year.

The majority of market analysts are betting on another increase of 0.25 percentage points to 12.50% at the same time that the business communities and labor unions clamor for a lower interest rate. An official announcement will be made only Wednesday evening.

A number of economists have pointed out that Copom preemptive attacks on inflationary pressure by consistently raising the Selic has technically not been efficient and that higher interest rates have stymied corporate investment and dampened hiring.

Antoninho Marmo Trevisan, a member of the president’s Council on Economic and Social Development (CDES), as well as the NGO, Competitive Brazil Movement (MBC), adds that a higher Selic makes consumer credit more expensive and worsens the public debt profile.

Trevisan says another indirect consequence is the valuation of the real against the dollar, which makes government interest payments more expensive. For example, says Trevisan, in 2010, the government paid R$ 195 billion in interest, and this year will pay over R$ 210 billion.

200% in Interest

Brazil’s central bank on Monday tightened rules on credit card loans backed by wages and pensions which households are increasingly using as a source of long-term borrowing.

Brazilian commercial banks will have to commit twice the capital they used to when extending payroll- and pension-deductible credit card loans for terms beyond 36 months, the central bank said in a statement.

The so-called risk weight factor, or the amount of capital that banks must set aside for such loans, will remain at 75% for maturities of up to 36 months.

Payroll-deductible loans have grown faster than other forms of loans since their creation in 2003 because they offer less default risks for lenders. But policymakers fear that rapid growth in that segment may hurt households, which are now spending a record 24% of their disposable income on debt-servicing.

The stock of credit card loans represents about 7% of outstanding household loans and only 1.7% of the financial industry’s loan book, according to data compiled by Goldman Sachs Group.

Still, consumers pay annual rates of up to 200% for normal credit card loans, the highest borrowing costs for that segment among the world’s major economies.

The rules governing the use of minimum payment on credit card balances will stay unchanged, the bank said. Policymakers decided earlier in the year that consumers pay bigger monthly installments on their credit card bills, in order to decrease their usage and lower the probability of defaults.

ABr

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