WASHINGTON DC, Oct 21 (IPS) – At 15 percent, Brazil’s monetary policy rate (called Selic) is one of the highest among major economies. Yet bank credit grew by 11.5 percent in 2024 and corporate bond issuance by 30 percent.
This credit expansion – despite the high policy rates – benefited many individuals, households and companies. But it also raised questions about the effectiveness of monetary policy itself. In other words, why did the central bank’s attempts to cool the economy by making financing more expensive seem ineffective?
Our analysis, in the context of Brazil’s latest annual economic review (the Article IV consultation) shows that concerns have been largely unfounded and that monetary policy transmission in Brazil remains effective. In fact, recent data suggests that credit growth is starting to slow.
What exactly happened?
Even as monetary policy worked as intended, we saw two other factors playing a crucial role: strong income growth and the country’s success in expanding financial inclusion. These factors stimulated the demand for credit and its supply.
A dedicated central bank
Brazil was the first major central bank to raise interest rates during the pandemic. After a period of easing, the country started a new tightening cycle in September 2024. These decisions were appropriate and motivated by the need to reduce inflation and inflation expectations to the 3 percent target.
The country’s annual inflation rate reached 5.1 percent in August, slightly lower than the previous month but still well above this year’s target. Inflation expectations are also expected to remain above target over an eighteen-month horizon. This explains the increase in policy rates since the pandemic, in line with standard principles of inflation targeting.
How effective is the transmission of monetary policy?
To measure the effectiveness of Brazilian monetary policy tightening, in our report we estimate how changes in the central bank’s policy rate feed through to bank loan interest rates paid by households and firms.
We think so an increase in the policy rate of 1 percentage point increases the interest rate on loans by approximately 0.7 percentage points after four months. To raise average interest rates in the economy by one percentage point, the monetary policy rate must rise by about 1.4 percentage points, since roughly 40 percent of total credit consists of government-directed lending that is less responsive to changes in the policy rate.
The analysis also shows that corporate loan interest rates have become more responsive to changes in the base rate since 2020. This may be partly due to the 2018 reform of Brazil’s major development bank, BNDES, which aligned its interest rates with long-term market rates.
Bank-level analysis shows that corporate loans are adjusting faster than consumer loans, likely due to tighter margins and more experienced borrowers. In turn, payroll-backed consumer loans are the least responsive due to interest rate caps.
What drove credit growth
Although Brazil’s monetary policy is working, credit growth has been strong in recent years. This was the result of both cyclical factors and structural changes. On the cyclical side, Brazil’s economy has grown faster than expected, with low unemployment and rising incomes driving greater demand for credit.
In addition, Brazil has implemented significant structural changes that have increased financial inclusion and credit availability.
The rapid expansion of fintech lenders gave more people access to credit. By 2024, digital banks and other fintech lenders would account for a quarter of the credit card market and more than 10 percent of defaulted personal loans.
Increased competition reduced concentration in the banking sector and lowered the average interest rates of established banks. In addition, corporate bond market financing as a percentage of GDP has tripled over the past decade, thanks to tax-exempt bonds. All these factors supported credit growth.
With a base interest rate of 15 percent, the Brazilian central bank has implemented a significant dose of monetary tightening to dampen credit growth and bring inflation and expectations back to target levels. New loan volume has fallen since April, further indicating that the treatment is working.
More broadly, the Brazilian economy is showing signs of moderation, against the backdrop of tight monetary and fiscal policies and increased global policy uncertainty. Overall, our research shows that concerns about the lack of effectiveness of monetary policy appear to be largely unfounded and that monetary policy transmission remains active in Brazil.
Daniel Leigh is IMF Head of Mission for Brazil; Swarnali A. Hannan is Deputy Head of Department at the IMF’s Western Hemisphere Department; And Rui Xu is an economist in the Monetary and Capital Markets Department
IPS UN Office
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