US embassy cable - 03BRASILIA2546

UNCLAS BRASILIA 002546 
 
SIPDIS 
 
NSC FOR WALLACE 
TREASURY FOR SSEGAL 
PLS PASS FED BOARD OF GOVERNORS FOR WILSON, ROBATAILLE 
USDA FOR FAS/FAA/ITP 
USDOC FOR 4322/ITA/IEP/WH/OLAC-SC 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EINV, PGOV, BR 
SUBJECT:  Central Bank Eases Reserve Requirement 
 
 
1.  The Central Bank (CB) on Friday August 8 reduced its 
reserve requirement on banks' demand deposits from 60 to 45%. 
That requirement thus reverts to what had been its long-term 
level from June 2000 until the CB raised it in February of 
this year, at the peak of Brazil's recent inflation 
uncertainties, in tandem with what was then the second 
successive monthly hike under the new GoB of the SELIC 
benchmark interest rate.  (Prior to March 2000, the reserve 
requirement was actually higher, at 65%.)  The change does 
not affect requirement on term deposits or savings accounts, 
which remain at 23 and 30%, respectively. 
 
2.  Effective August 11, this move will free up eight billion 
Reals (about USD 2.7 billion) for banks' use, according to 
the CB's Monetary Policy Department.  The GoB hopes this 
money will be put to benign effect in the form of expanding 
credit and reducing interest rates.  Brazil's three biggest 
national retail banks (Bradesco, Itau and Unibanco) have 
already announced modest adjustments of some retail interest 
rates -- from 9.3 and 9.35% to 8.7 and 8.9% per month (sic), 
respectively, on private check-credit rates by Bradesco and 
Itau, for example. 
 
3.  The drop had been universally awaited as a signal of the 
GoB's anti-recessionary resolution.  However, no-one believes 
its direct effect will be anything more than marginal in 
fomenting economic revival.  Numerous commentators note, in 
fact, that lack of demand for credit in Brazil's somber 
current economic landscape may result in the freed-up funds 
not going towards new loans at all, just into banks' 
purchases of more GoB bonds, or of foreign currency. 
 
4.  The CB announcement came against a background of ever- 
intensifying demands for GoB policies to stimulate growth, 
plus work on a vaguely-described GoB package of emergency 
measures (Septel).  As token of the pressure, Chief of Staff 
Dirceu had earlier been quoted conspicuously out-of-portfolio 
as promising Brazil's governors that the reserve requirement 
would be lowered by week's end.  Amidst some media reports 
that the decision was resisted by Central Bank professionals, 
Finance Minister Palocci has since made a point of stressing 
that it was made on purely technical, not political grounds, 
and was justified by positive developments in Brazil's 
inflation data and expectations. 
 
5.  A senior CB contact volunteered to us Friday afternoon 
that the reserve-requirement change's impact seemed to have 
been even more modest than the Monetary Policy Department had 
hoped, to judge from the early exchange-rate reaction.  He 
implied further cuts in the rate might be considered, even 
though, at 45%, it is now as low as it has been for years. 
 
6.  COMMENT:  Brazil's economic focus will now be fixed on 
the COPOM's (Monetary Policy Committee) next decision 
concerning the SELIC rate, at its monthly meeting on August 
20.  With figures for industrial production showing a 
sectoral recession already under way, and with recent 
inflation numbers at least slightly better than had been 
feared, clamor can only grow for the COPOM to chop the SELIC 
by more than the 1.5% (from its present 24.5%) that the 
market has already begun to anticipate.  We expect the CB 
not/not to bend to ongoing public and political protests over 
the Lula administration's economic-policy course, but nor do 
those protests look likely to abate