The Brazilian central bank’s decision to cut the country’s Selic rate for a 10th consecutive time takes the benchmark to an historic low of 6.75% and creates notable challenges for Brazil’s banks to maintain profitability, according to analysts.
Most economists think the central bank will hold at the 6.75%, but the fall in the policy rate has been steep and will hit banks’ margins.
The Selic rate was 14.25% in October 2016 and Brazil’s banks enjoyed a boost to earnings in 2017 from the fact that funding costs are predominantly floating rate and therefore fall faster than the fixed interest rates charged to their borrowers.
However, a prolonged period of historically low interest rates will lower net interest margins (NIMs) and, as a result, will pressure profitability.
“Sharp monetary easing has created a new paradigm for Brazilian banks,” according to Ceres Lisboa, senior vice-president in Moody’s financial institutions group in São Paulo, and head of a new report about Brazil’s banking industry.
“Although the economy is growing, such an extended period of low rates is new for Brazil and will strain earnings at the country’s largest listed banks.”
