The Economist – from the print edition, 04/21/2012
“HISTORIC”; “drastic”; “unbeatable”: no one could accuse Caixa Econômica Federal, Latin America’s fourth-largest bank, of downplaying its latest interest-rate cuts. Anywhere except Brazil, the supposedly cut-price loans it offers would look more like usury. Interest on overdrafts, for example, has fallen from 157% a year to 51%. Customers whose salaries are paid into a Caixa account will soon be offered a credit card charging 2.85% monthly—down from 12.86%. Yet Caixa is not exaggerating about the break with the past that its new rates represent. For Brazilians with recent memories of hyperinflation, an overdraft at 51% a year is an unheard-of bargain.
Now the government is trying to force the pace. On April 18th the Central Bank made its sixth consecutive cut to its policy rate, bringing it to 9%, an all-time low in real terms. Its policymakers see subdued global demand as an opportunity to reset rates at a lower level, without risking a return to higher inflation.
However, government officials believe Brazil’s big banks wield hefty market power, and worry that they will gobble up the benefits instead of passing them on to consumers. As a result, they have resorted to browbeating, dragging bankers into the finance ministry and ordering them to cut rates and lend more. Earlier this month Murilo Portugal, the president of Febraban, the bankers’ trade association, met Guido Mantega, the finance minister. He suggested that lower reserve requirements and taxes, together with greater rights for creditors, would help to cut rates. Mr Mantega later retorted publicly that the conditions were already in place for Brazilian banks to stop being the “world champions of spread”. He suggested the cuts could come out of the banks’ profits instead.