What to expect from credit expansion?

BRAZIL ECONOMICS - Report 29 Jul 2019 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

As the economy is virtually stagnant and inflation (current and expected) is significantly below the target, this week the Central Bank will start a new monetary easing cycle. Credit is an important channel for transmission of monetary policy, and it has been showing some growth, which together with low real interest rates for an extended period can help accentuate the recovery of household consumption and produce some growth of industrial output. Credit is expanding faster to households, but in the case of credit to companies, it is necessary to consider both bank loans and financing from the capital market by issuing bonds, a method of growing importance that has contributed to reduce the cost of financing.

A new reality has taken hold in the country’s financial market: the retraction of public banks, especially the BNDES, whose loan book is currently about half the size of its stand at 2014-year end. Following the extinction of subsidized BNDES loans (the replacement of the TJLP by the TLP), and the decline of the entire structure of interest rates (the yields of NTN-Bs maturing in 2030 and 2040 are presently around 3.4% and 3.6% a year, respectively, and should remain low for a prolonged period), companies have rediscovered the capital market, increasing their bond issues. Indeed, when adding bank loans to bond issues, there is clear growth of the total stock of credit. In a special study in the Inflation Report for the fourth quarter of 2018 (“Early settlement of National Financial System Credit Operations”), the Central Bank showed there has been a trend for early retirement of bank loans and substitution with financing from the capital market at lower cost.

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