Brazil Frees Up More Funds for Bank Loans

By Dow Jones Business News, 
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SÃO PAULO--Brazil's central bank on Friday announced measures intended to boost economic growth by freeing up more money for banks to loan out.

The central bank reduced the amount of money that banks are required to keep as reserves from certain term deposits, which should free up 30 billion reais ($13.5 billion) for lending, the bank said. The accounts involved currently hold 405 billion reais.

The bank also loosened reserve requirements for payroll-linked loans and auto loans, which could add an additional 15 billion reais.

Brazil's government is trying to improve economic growth ahead of the presidential elections in October. After expanding 2.5% in 2013, Brazil's economy is expected to grow less than 1% this year, according to economists.

The central bank's action was applauded by bankers. Economists, though, expressed concern about what they see as contradictory signals from the central bank, which is struggling in its battle against inflation.

"The measures are very important, very positive given the fact that it came at a moment of tepid economic activity," according to Luiz Carlos Trabuco Cappi, president of Banco Bradesco SA, one of Brazil's biggest private-sector banks.

The country's weak economic expansion and a potential weakening of Brazil's vigorous labor market are among the main threats to President Dilma Rousseff's re-election campaign, according to political observers.

Credit growth rates have slowed from about 20% a year as recently as 2010 to about 10% now due to the weaker economy and the higher indebtedness of Brazilian families.

"I see it as very positive because it paves the way [for banks] to expand loans for certain segments" where credit growth had slowed, said Itau Chief Executive Officer Roberto Setubal.

Others say the moves don't seem to jibe with the bank's efforts against inflation.

The annual inflation rate had been just under the 6.5% ceiling of the central bank's target range for much of the year, and the rate finally hit the upper limit in June.

The bank raised its benchmark interest rate nine times between April 2013 and last April to try to rein in price increases. In the minutes of its most recent monetary policy meeting, released Thursday, the bank emphasized its focus on keeping prices under control and said it won't be cutting interest rates soon despite the weak economy.

"It is hard to understand the reasoning behind the changes announced today that are intended to foster credit operations at a time when the Brazilian monetary authority tries to tame inflation," said Jankiel Santos, chief economist at BES Investimento.

Central bank officials have said repeatedly that current inflationary pressures aren't coming from the demand side, so measures that spur lending have no impact in inflation.

Write to Rogerio Jelmayer at rogerio.jelmayer@wsj.com

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