Brazil doubles tax on consumer credit to fight inflation

Friday, April 8th 2011 - 07:27 UTC

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Average rate on consumer loans in Brazil stood at 43.8% in February

Brazil doubled a tax on consumer credit as the administration of President Dilma Rousseff’s shifts its focus to fighting inflation. Beginning Friday consumer loans, excluding mortgages, will be subject to a 3% annual tax, up from a previous rate of 1.5%, according to a Finance Ministry statement.

Policy makers are adopting a mix of higher interest rates, measures to curb credit growth and budget cuts as they try to prevent inflation, already at a two-year high, from exceeding the 6.5% upper limit of their target range.

Credit growth in Brazil’s economy picked up in February. Total outstanding credit rose 1.3% in February from January to 1.74 trillion Real (1.05 trillion USD), up from a 0.6% increase the previous month. Credit rose 21% from a year earlier.

Finance minister Guido Mantega said the higher tax on consumer loans can be repealed when credit growth slows to an “adequate” pace of 12% to 15% a year. He said the government can take additional measures to curb demand and inflation.

“The government won’t allow inflation to run out of control,” he said.

Brazil’s Central bank forecasts credit growth of 13% in 2011, Tulio Maciel, acting head of the bank’s economic research department, said March 29. The average rate charged on consumer loans was unchanged at 43.8% in February.

In December, the Central bank raised reserve and capital requirements as part of its plan to fight inflation by reducing credit. The government has also increased taxes on foreign loans with the dual goal of reducing credit and restricting capital inflows that fuelled a 46% rally in the Real since the end of 2008.

Categories: Economy, Brazil.

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GeoffWard
Growth of credit looks good to the new middle class, but it is over 20% per year and needs a bucket of cold water throwing over it.

Credit, like inflation, is cumulative in the economy and also as the economy grows, 20% of a big economy is a much bigger quantitative problem than 20% of an embryonic economy. And if it spreads into social groups unable to balance their books as inflation increases, then the bubble bursts with a vengance.

With ever increasing levels of personal debt , especially mortgages, compounded by high levels of state (federal) debt, the Brasilians are about to get their own taste of the 'British disease'.

Mantega - be very, very careful.
Apr 08th, 2011 - 06:36 pm 0
Forgetit87
Debt as a percentage of househould income has been stable (at 25%) since 2006. And actually, higher inflation is good for those with high levels of indebtness.
Apr 08th, 2011 - 08:52 pm 0
GeoffWard
If income keeps pace, certainly. But if it doesn't?
Apr 08th, 2011 - 09:26 pm 0

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