Monetary Policy’s Impact on Lending Rates: A Brazilian Analysis

Brazil’s Monetary Policy: How Interest Rate Changes Impact Lending

by Archyde Staff | October 27,2023

Understanding how monetary policy translates into tangible effects on lending rates is crucial for businesses and individuals alike. A recent analysis from the International Monetary Fund (IMF) sheds light on this critical transmission mechanism in Brazil.

the core of monetary policy transmission lies in the benchmark interest rate, known as the Selic rate in Brazil. When the Central Bank of Brazil adjusts this rate, it sends ripples throughout the financial system.

An increase in the Selic rate generally makes borrowing more expensive for commercial banks. Consequently, these banks tend to pass on these increased costs to their customers through higher lending rates.

Conversely, a reduction in the Selic rate typically lowers borrowing costs for banks, which can then lead to more favorable lending rates

How does the Selic rate influence interest rates on personal loans in Brazil?

The Central Bank of Brazil & The selic Rate

The Banco Central do brasil (BCB) wields notable influence over Brazil’s economic landscape, primarily through its monetary policy. The cornerstone of this policy is the Selic rate (Sistema Especial de Liquidação e de Custódia), the benchmark interest rate. Understanding how adjustments to the Selic rate ripple through the financial system and affect lending rates is crucial for businesses, consumers, and investors alike. Essentially, the Selic rate dictates the cost of overnight interbank lending, and this cost forms the base for all other interest rates in the economy.

How Selic Rate changes Affect Commercial Banks

When the BCB raises the Selic rate, it becomes more expensive for commercial banks to borrow money.This increased cost is inevitably passed on to consumers and businesses in the form of higher loan interest rates. Conversely, a reduction in the Selic rate lowers borrowing costs for banks, leading to possibly lower interest rates on loans, stimulating economic activity.

Here’s a breakdown of the transmission mechanism:

Increased selic → Higher CDI: The certificado de Depósito Interbancário (CDI), closely linked to the selic, also rises.

Higher CDI → Increased Funding Costs for Banks: Banks rely on the CDI for short-term funding.

Increased Funding costs → Higher Lending Rates: Banks increase rates on personal loans, auto loans, mortgages, and business loans to maintain profitability.

Types of Lending Rates Impacted in Brazil

Several key lending rates in brazil are directly influenced by the Selic. These include:

Personal Loans (Empréstimos Pessoais): Highly sensitive to Selic changes, ofen with the quickest adjustments. Expect higher APRs (Annual Percentage Rates) when the Selic rises.

Auto Loans (Financiamento de Veículos): While often subsidized,auto loan rates still track the Selic,particularly for longer-term financing.

Mortgages (Financiamento Imobiliário): Historically,mortgages have benefited from government programs like the FGTS (Fundo de Garantia do Tempo de Serviço),but the overall cost of credit is still tied to the Selic.The Taxa Referencial (TR), often used in mortgage calculations, is also influenced by broader interest rate trends.

Business Loans (Empréstimos Empresariais): Crucial for investment and expansion, business loan rates are considerably impacted by Selic adjustments, affecting companies’ ability to access capital.

Credit Cards (Cartão de Crédito): Revolving credit rates on credit cards are among the highest and most responsive to Selic changes.

Ancient Analysis: Selic & Lending Rate Correlation (2015-2024)

Analyzing the period between 2015 and 2024 reveals a strong correlation between Selic rate fluctuations and lending rates in Brazil.

2015-2016 (High Inflation): The BCB aggressively raised the Selic to combat high inflation, pushing loan interest rates to double-digit figures. This significantly curtailed consumer spending and business investment.

2017-2020 (Economic Recovery & Low Inflation): As inflation cooled, the Selic was gradually lowered, leading to more affordable credit rates and a modest economic recovery.

2021-2023 (Pandemic & Inflation Surge): The COVID-19 pandemic and subsequent global supply chain disruptions triggered a surge in inflation. The BCB responded with a series of aggressive Selic hikes, reaching 13.75% in August 2022. this dramatically increased the cost of borrowing.

2024 (Easing Inflation): With inflation showing signs of easing, the BCB began a cautious easing cycle, reducing the Selic rate. This has led to a gradual decline in lending rates, offering some relief to borrowers.

The Role of Credit Risk & Bank Spreads

While the Selic rate is a primary driver, it’s not the sole determinant of lending rates. Credit risk – the likelihood of a borrower defaulting – plays a significant role. Banks assess borrowers’ creditworthiness (using tools like Serasa Experian scores) and charge higher rates to those deemed riskier.

Moreover, bank spreads (the difference between the rate banks charge borrowers and their own funding costs) contribute to the final interest rate.Larger spreads indicate higher bank profitability but also mean borrowers pay more. Competition within the banking sector can influence spreads; increased competition typically leads to narrower spreads and lower loan rates.

Impact on specific Sectors: Real Estate & Automotive

The real estate and automotive sectors are particularly sensitive to changes in lending rates.

Real estate: higher mortgage rates dampen demand for housing, leading to slower sales and potentially declining property values. The ABSS (Associação Brasileira de Securitização) reports a direct correlation between Selic and mortgage approvals.

Automotive: Increased auto loan rates make vehicles less affordable, impacting sales volumes. Manufacturers often offer financing incentives to offset the impact of higher rates, but these are often limited.