Brazil’s Central Bank has warned that the aggressive tightening of the country’s monetary policy is beginning to affect the economy.
Banco Central do Brasil’s latest Financial Stability Report ,, released on Tuesday, projected themedian return on equity (ROE), for non-financial publicly-listed companies, could drop to only 3.92% in September 2025 compared with 8.92% when the current rate hike cycle started.
The forecast is accurate, but it will be the lowest ROE in Brazil since September 2017. At that time, Brazil was recovering from the deep recession caused by political instability, fiscal instability and the global commodities downturn.
This projected ROE also falls short of the COVID-19 Crisis, when profitability fell to just 5.54% by mid-2020.
The bank stated that while the effects may not be as severe as during the recession of 2015-2016, “corporate payments capacity will decline in the near term.”
Selic increases pressure on corporate earnings
In an effort to combat inflation, the central bank increased its benchmark Selic interest rate from 13.50% to 14.25% by 375 basis point.
The annual inflation rate was still high at 5.49 %, which is well above the target of 3%, and this has led to expectations that another increase will be made in May.
The tightening of monetary policy has moderated the inflationary pressures but has increased borrowing costs and impacted corporate profits.
Central banks must strike a balance between reining in the inflation and ensuring economic growth.
Corporate Brazil seems to have borne the brunt so far of the adjustments.
Credit markets for households: Red Flags
The central bank has warned that the demand for corporate credit is decreasing, but there are new risks emerging in residential and consumer lending markets.
In spite of high interest rates, credit to households increased in 2024. This was especially true for lower income and higher risk borrowers.
The number of auto loans increased, as more people financed older cars and made smaller down payments. This raised concerns over deteriorating credit. Personal loans without collateral also increased, indicating a loosening in lending standards.
The central bank has noted that, despite the fact that lending to the real sector continued to grow in 2018, lenders will be more cautious by 2025.
The survey found that the risk-taking attitude of respondents was declining due to increasing household debt, and a fragile financial situation for small businesses.
The central bank has warned against potential instabilities, urging “increased caution” and “vigilance”, when it comes to lending.
In the coming months, both the corporate and consumer sector could be under renewed pressure.
The post Brazil Central Bank warns that corporate profits may plummet to an 8-year low due to rate increases may be updated as new information unfolds
