MercoPress. South Atlantic News Agency

Brazil working on package to further lower interest rates without scaring savers

Rousseff has warned banks must lower rates

Brazilian President Dilma Rousseff plans to unveil changes to rules related to savings accounts on Thursday, government sources said, a key move to pave the way for lower interest rates in Latin America's largest economy.

Yields on Brazilian interest rate futures contracts tumbled on Wednesday on speculation that Rousseff is preparing to lower mandatory returns on savings. The current mandatory returns are a deterrent to deeper cuts to the central bank's base interest rate, the Selic.

Rousseff is crusading to bring down interest rates and keep them low to support a sluggish recovery in Brazil, which saw growth slow to a rate of 2.7% last year after a blazing 7.5% expansion in 2010.

Permanent lower rates would be an earth-shattering change in a country long used to some of the world's highest rates.

If the Selic falls below the current 9%, government officials worry investors could drop Selic-linked federal bonds to seek better returns in savings accounts, which are all tax free.

A stampede to savings accounts would likely to raise the government's financing costs. Rousseff and her economic team are working on the final details of the changes to the century-old rules, according to government sources.

The head of Brazil's Association of Savings and Mortgage Institutions, Octavio de Lazari Junior, said the government's changes would likely apply to funds saved after the measures are adopted rather than on funds savers have already put away.

“From the conversations that we have had with the government... any changes will not be traumatic,” said de Lazari Junior, who is also executive director at Banco Bradesco, the country's No. 2 private-sector lender.

Changing savings rules is a politically charged issue in Brazil. Millions of Brazilians lost their life savings after former President Fernando Collor de Mello froze accounts in a failed bid to control inflation in the 1990s.

Savings in Brazil are tax free and pay out a fixed interest rate of 0.5% per month plus a variable rate, which bring the total return to about 6% per year. Inflation for the past 12 months to the end of March was 5.2%.

The government's options include linking returns to the Selic rate minus a set percentage or to the IPCA monthly inflation index. The government could also start taxing the returns on savings above a certain amount.

Some analysts see softer changes related to the application of those deposits to include federal bonds. Banks are now forced to use most of those accounts to finance mortgage credit.

Rousseff could make the changes via an executive decree, but reforms would ultimately have to be approved or rejected by Congress.

The highly popular Rousseff this week urged banks to bring down the cost of borrowing to foster the nation's development and help stoke an economic recovery.

In a televised address on Monday Rousseff warned banks her government would be “firm” in demanding they cut lending rates in tandem with the central bank's falling benchmark rate.

Some banks have bowed to government pressure, easing costs on some credit, but they are worried high delinquency among Brazilians could erode profits.