Weekly Report - 1 July 2003

The decision to lower the benchmark interest rate for the first time in almost a year (albeit by only half a point, to a still high 26%) is being interpreted by many as a turning-point. The government is basically declaring victory in its effort to contain inflation, and can now shift the emphasis onto growth.

The change was marked by the launch, on 25 June, of two new subsidiaries of the Banco do Brasil to promote lending to small businesses. One is a bank, the other will be a finance company.

Reportedly, President Lula da Silva himself chose the name of the bank, Banco Popular do Brasil. It will aim to lend, and provide other banking services, to people whom the existing banks believe are not worthy of credit.

It will be separately capitalised from Banco do Brasil and will aim at serving the informal sector and people on low incomes. The target is to create links with 1m people in 2004.

The other subsidiary is a leasing and finance company, which will aim to provide the same sorts of people with access to big ticket items such as vehicles and farm machinery.

Another of the state-owned banks, Caixa Econômica Federal, announced this week that it was halving its monthly interest rates on small loans to poor people (micro-credit) from 5% to 2.5%.

It is not yet clear when this programme will start or how much money will be available under it: negotiations about financing it are still going on with the finance ministry. The Caixa expects heavy demand: it pointed out that its simplified account, (in which people do not have to prove their income, just their identity), which it launched three months ago, has signed up 200,000 people: this is well ahead of the target for the first year, which was 500,000.

Separately, the government confirmed that its long-term inflation target is 4%, significantly above the target set by the previous government of 3%. Antônio Palocci, the finance minister, admitted that the government would not meet its target next year.