By: Ngiinomenwa-vali Hangala
An analysis by the International Monetary Fund (IMF) last week has revealed some market anomaly in the Brazilian economy, where credit growth was strong despite a high repo rate, prompting questions on the effectiveness of the monetary policy interest rate.
At 15 percent, Brazil’s monetary policy interest rate (called Selic) is one of the highest among major economies. However, in 2024, bank credit grew by 11.5 percent, and corporate bond issuance rose by 30 percent.
According to the IMF this credit expansion – in the face of high policy rates – benefitted many individuals, households, and companies. “But it also raised questions about the effectiveness of the monetary policy itself. In other words, why did the central bank’s efforts to cool down the economy, by making financing more expensive, seem not to be working?” queried the IMF researchers.
Their analysis, based on Brazil’s latest yearly economic review (the Article IV consultation), shows that concerns have been largely unwarranted and that monetary policy transmission in Brazil remains effective, adding that recent data indicates slowed credit growth.
The researchers indicated that even as monetary policy was fulfilling its intended purpose, there were two other factors playing a critical role in limiting its effectiveness to cool down credit extension in Brazil. These were strong income growth and the country’s success in expanding financial inclusion; these two factors boosted the demand and supply for credit.
The effectiveness of the monetary policy and its transmission mechanism to reach all economic participants has been under scrutiny, with some saying it only benefits the commercial banks, while others question its ability to improve access to capital.
In Brazil, despite its struggles to tame the growing lending/borrowing, the IMF stated that the monetary policy is indeed working. The strong credit growth over the past few years was due to both cyclical factors and structural changes. On the cyclical end, Brazil’s economy has grown faster than expected, with low unemployment and rising incomes driving higher credit demand.
Moreover, Brazil has been making significant structural changes which have increased financial inclusion and credit availability. The IMF researchers also explained that the rapid expansion of fintech lenders gave more people access to credit. In 2024, digital banks and other fintech lenders in Brazil accounted for a quarter of the credit card market and over 10 percent of non-payroll personal loans.
“The increased competition reduced banking-sector concentration and lowered average lending rates of incumbent banks,” wrote the IMF. With a 15 percent basic rate, Brazil’s central bank has administered a strong dose of monetary tightening aimed at deterring credit growth and driving inflation and targeted expectations.
The latest data, as analysed by the IMF, shows that new loan volumes in Brazil have been reducing since April, further suggesting that the monetary treatment is working. More broadly, Brazil’s economy is showing signs of moderation amid tight monetary and fiscal policies and elevated global policy uncertainty.
“Overall, our research shows that concerns about the lack of effectiveness of monetary policy are proving to be largely unwarranted and that monetary policy transmission in Brazil remains active,” the IMF affirmed.
