Reuters: Regulatory News: UPDATE 1-Brazil to unveil saving rules change -sources

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UPDATE 1-Brazil to unveil saving rules change -sources May 2nd 2012, 23:00 Wed May 2, 2012 7:00pm EDT * Changes to savings accounts key for rates to move lower * Gov't still finalizing details, likely to focus on returns * Yields on rate futures tumble as savings rule change looms By Ana Flor and Jeferson Ribeiro BRASILIA, May 2 (Reuters) - Brazilian President Dilma Rousseff plans to unveil changes to rules related to savings accounts on Thursday, government sources said, a key move to pave the way for lower interest rates in Latin America's largest economy. Yields on Brazilian interest rate futures contracts tumbled on Wednesday on speculation that Rousseff is preparing to lower mandatory returns on savings. The current mandatory returns are a deterrent to deeper cuts to the central bank's base interest rate, the Selic. Rousseff is crusading to bring down interest rates and keep them low to support a sluggish recovery in Brazil, which saw growth slow to a rate of 2.7 percent last year after a blazing 5.7 percent expansion in 2010. Permanent lower rates would be an earth-shattering change in a country long used to some of the world's highest rates. If the Selic falls below the current 9 percent, government officials worry investors could drop Selic-linked federal bonds to seek better returns in savings accounts, which are all tax free. A stampede to savings accounts would likely to raise the government's financing costs. Rousseff and her economic team are working on the final details of the changes to the century-old rules, said two government sources who spoke on condition of anonymity. The head of Brazil's Association of Savings and Mortgage Institutions, Octavio de Lazari Junior, said the government's changes would likely apply to funds saved after the measures are adopted rather than on funds savers have already put away. "From the conversations that we have had with the government... any changes will not be traumatic," said Junior, who is also executive director at Banco Bradesco, the country's No. 2 private-sector lender. Changing savings rules is a politically charged issue in Brazil. Millions of Brazilians lost their life savings after former President Fernando Collor de Mello froze accounts in a failed bid to control inflation in the 1990s. Savings in Brazil are tax free and pay out a fixed interest rate of 0.5 percent per month plus a variable rate, which bring the total return to about 6 percent per year. Inflation for the past 12 months to the end of March was 5.2 percent. The government's options include linking returns to the Selic rate minus a set percentage or to the IPCA monthly inflation index. The government could also start taxing the returns on savings above a certain amount. Some analysts see softer changes related to the application of those deposits to include federal bonds. Banks are now forced to use most of those accounts to finance mortgage credit. Rousseff could make the changes via an executive decree, but reforms would ultimately have to be approved or rejected by Congress. BANKS OFFENSIVE The highly popular Rousseff this week urged banks to bring down the cost of borrowing to foster the nation's development and help stoke an economic recovery. In a televised address on Monday Rousseff warned banks her government would be "firm" in demanding they cut lending rates in tandem with the central bank's falling benchmark rate. Some banks have bowed to government pressure, easing costs on some credit, but they are worried high delinquency among Brazilians could erode profits. The central bank has slashed 350 basis points off the Selic since August, to a near-record low of 9 percent. The bank has hinted it could lower rates further as inflation eases to help the sluggish recovery. The yield on the interest rate futures contract due in January 2014, the most traded early on Wednesday, fell to 8.57 percent from 8.73 percent at the opening. Rate futures contracts are used by investors to bet on the level of the benchmark Selic rate at a certain period. Yields also fell after data showed U.S. private employers added far fewer jobs than expected in April, adding to investor concern over the pace of recovery in the world's largest economy. Link this Share this Digg this Email Reprints

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