UPDATE 2-Brazil central bank eases reserve rules to boost investment

Thu Dec 27, 2012 6:01pm EST

Related Topics

* Reserve requirements conditioned to capital goods lending

* Underinvestment in industry blamed in part for stagnation

* Measure should free up equivalent of $7.3 billion (Adds background on economy, central bank interest rate moves)

BRASILIA, Dec 27 (Reuters) - Brazil's central bank said on Thursday it would cut reserve requirements on demand deposits under specific conditions to free up around 15 billion reais ($7.3 billion) for lending in a move aimed at boosting investment in the stagnating economy.

The reserve requirement will be cut by 20 percent when the freed-up funds are disbursed specifically through the PSI, a government-backed capital goods investment program, in an effort to raise spending on industrial equipment such as machinery and trucks.

Economists have increasingly pointed to underinvestment in industry as one of the factors limiting the potential of Latin America's largest economy, which boomed in the previous decade as expanded credit boosted domestic consumption.

The change in reserve requirement will take effect on Jan. 30, 2013, for banks with at least 6 billion reais in capital.

The central bank has tried to stem the slowdown in Brazil's economy with a run of ten straight cuts to the benchmark interest rate, the Selic, over the course of a year. Those cuts lopped a total of 525 basis points off the key rate, taking it down to 7.25 percent.

At the same time, the government has unveiled a host of stimulus measures such as tax breaks and has extended the PSI capital-goods financing program until the end of 2013.

The interest rate on loans made under the PSI program starts at 3 percent per year.

The central bank does not pay interest on demand deposits, which depositors can withdraw at anytime without notice.

($1 = 2.0544 Brazilian reais) (Reporting by Tiago Pariz, writing by Peter Murphy and Caroline Stauffer; editing by Steve Orlofsky, G Crosse)

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