Are High Interest Rates Holding Back Brazil’s Economy?
At 53 percent, Brazil has the highest bank lending interest rates among 55 developed and underdeveloped countries, according to research firm Trading Economics. As of July, annual consumer credit card interest rates surpassed 270 percent for unpaid balances. Meantime, Brazilian borrowers must pay lending rates that average 38 percent higher than the rates the lenders must pay, a far larger spread than in other locations such as Argentina and Mexico, according to a 2017 World Bank report. Why are lending rates so high in Brazil? How much are the high rates holding back the country’s economy? Should efforts be made to bring the rates down, and how can that be accomplished?
Mario Mesquita, chief economist at Itaú Unibanco: “International comparisons on credit interest rates or spreads are not straightforward, given the inexistence of a standard measure. It is important to note that the most commonly used measure for lending interest rates and spreads in Brazil takes into account new loans only. In this sense, we believe it is more appropriate to focus our analysis on other indicators. Since 2017, the Brazilian central bank has released an index to evaluate the cost of credit, the Cost of Credit Index (ICC). The ICC takes into account the interest rate charged in overall outstanding loans, instead of the new loans only. In July, the average interest rate and spread using the ICC index were 20.9 percent and 14 percent, respectively. According to the central bank, between 2015 and 2017, the delinquency cost represented 37.4 percent of the spread. It was followed by administrative expenses (25 percent) and taxes and the credit guarantee fund (22.8 percent). The financial margin of the banks was responsible for only 14.9 percent. The delinquency cost could be reduced by…”Read More
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