Brazilian President Dilma Rousseff will link returns on some national savings accounts to the central bank's lending rate, according to a draft presidential decree seen by Reuters on Thursday, a risky move that would allow her government to continue cutting rates in coming months.
Ms. Rousseff has made reducing interest rates a top priority as she tries to revive an economy that has been on the brink of recession since mid-2011. The benchmark Selic rate is at 9 per cent, near historic lows for Brazil, but exorbitant compared with rates close to zero in Europe and the United States.
One of the biggest obstacles to bringing the Selic down further is the fixed rate of return for savings accounts, Brazil's most popular investment vehicle. The rate is currently set at about 6 per cent annually, which once tax incentives and other factors are taken into account amounts to a de facto floor for the Selic at or around its current level.
The decree said returns on savings accounts would be set at a level equivalent to 70 per cent of the Selic when the Selic falls below 8.5 per cent. The current system of fixed returns will remain in place when the Selic is at or above that level.
By setting 8.5 per cent as the cutoff level, the initiative signals that Ms. Rousseff is paving the way for the Selic to fall further than some analysts had anticipated in coming months. Some investors had been betting on only another cut of a quarter percentage point.
Finance Minister Guido Mantega is expected to outline more details of the plan later on Thursday.
The proposal carries enormous political and economic risks and amounts to a fundamental re-engineering of the basic pillars of Brazil's financial system. Brazil's currency and interest rate futures markets have both been highly volatile this week as investors try to account for the changes.
"A historic decision," Andre Guilherme Pereira, an economist for Gradual Investimentos, wrote in a note to clients on Thursday. "We wish all the luck in the world to the government. They're making a really, really high-stakes bet."
The real was about 0.2-per-cent weaker in afternoon trade on Thursday at 1.927 per dollar. It has shed almost 3.3 per cent of its value this year as investors anticipate that lower interest rates will make Brazilian assets less attractive.
The central bank cut the Selic rate 75 basis points last month, and it is now down 350 basis points since August. In minutes from its latest monetary policy meeting, the bank left the door open to further rate cuts in coming months.
Brazilians hold more than 432.1 billion reais ($225-billion U.S.) in savings accounts, Bank of America said in a report this week. The accounts' perceived safety and fixed returns, which date back to the 19th century when Brazil was part of the Portuguese empire, are highly valued because of the country's long history of financial turmoil.
Many Brazilians are still traumatized by former President Fernando Collor's attempt to freeze savings accounts in the early 1990s. Mr. Collor was later impeached because of separate corruption charges.
An attempt by Ms. Rousseff's predecessor to modify the rules in 2009 was abandoned because of a public outcry. Brazil's Congress is likely to push back on the issue as municipal elections in October draw closer.
The changes are also likely to meet resistance from Brazilian banking executives, many of whom are quietly skeptical of Ms. Rousseff's push for lower rates. They worry that rising default rates and persistent inflation, which was 5.25 per cent in the 12 months through mid-April, could eventually cause problems if the central bank cuts rates prematurely.
However, Ms. Rousseff appears prepared to stake her reputation and high public approval ratings on the issue, believing that lower rates are a necessary condition for Brazil to resume the high economic growth rates that made it a star among emerging markets during the past decade.
At a ceremony to swear in her new labour minister on Thursday, Ms. Rousseff repeated her call for Brazil's rates to come down in line with levels seen abroad.
Brazil's economy grew just 2.7 per cent in 2011 after a blazing 7.5-per-cent expansion in 2010. The main drag on the economy has been sagging manufacturing activity – which would also benefit from lower interest rates, as the currency weakens and makes Brazilian products more competitive with imports.