Higher interest rates may impact household debt

HOUSEHOLD: O Que Significa Household? (Tradução) - Inglês no Teclado

The new cycle of interest rates hikes in the country blares a warning for the possible impacts on the budget of Brazilian families, whose income commitment to debt is at record levels. For some economists, the combination may slow consumption and bring a greater focus on the payment of already contracted debts. Others consider that, even if the trajectory of Brazil’s benchmark interest rate Selic is ascending, the level reached would be a historically low for Brazil, dispelling major concerns regarding default.

The long period of easing monetary policy by the Central Bank, which took the Selic to 2% in early 2021 from 14.25% per year in mid-2016, was followed by a significant reduction in the average interest rates on credit operations to the consumer (to 23% from 42% a year) and increased debt in households (to 30% of GDP from 25%), says Ailton Braga, former Central Bank analyst and current Senate legislative consultant, in an article published on the Blog do Ibre, the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre).

As a percentage of the families’ annual income, he says, debt rose to 58% in March this year from 44.3% in April 2017, according to Central Bank data. The commitment of monthly income to debt service went to 30.4% in March 2021 from 26.6% in January 2018.

According to Mr. Braga, the increase in debt was greater than that of the commitment of income with debts over the last years because of the reduction of interest in the period and the lengthening of the term of loans payments, mainly due to the growth of real estate credit. The expansion of debt, however, has limits. “There is this indication that the income commitment varies in a narrow range and we have reached a maximum. How much can a family commit of its income with the payment of debts? It can not be 50%”, says Mr. Braga to Valor.

For him, the recently started high Selic cycle, which should reach something between 6.5% and 7.5% by the end of the year, could add a relevant impact to this scenario. “Despite being, for Brazil, a historically low rate, it will result in an increase in consumer interest rates at a time of high debt.”

Added to this is the increase in current inflation and expectations, which triggered a new bullish cycle of Selic, taking it to something between 6.5% and 7.5% by the end of the year, Mr. Braga notes. “Despite being a historically low rate for Brazil, it will result in an increase in consumer interest rates, at a time of high debt.”

Families, he says, will have to adjust the household budget to be able to reduce the slice of committed income. “They must reduce spending, choose to pay debts and avoid taking on new debt,” he says. The repercussion, according to Mr. Braga, tends to be a reduction in household consumption. “But you cannot say that it will mean a fall in total aggregate demand and the GDP,” he says.

For Isabela Tavares, an economist at Tendências Consultoria, the level of household income commitment is “relatively controlled”. According to the Tendências indicator, which considers income to be the total wages, the commitment of families with debt advanced 1.3 percentage point in April, compared to the same month of 2020, to 22.9%. Debt, which also includes the interest-free credit card balance, rose 5 percentage points to 48.2%.

“I don’t think it has anything too explosive because of the interest itself. It is a scenario of raising, but not up to those maximum levels that we have seen,” she says, also mentioning recent measures that contribute to increasing banking competition and balancing interest, such as Pix, the Central Bank’s instant payment system.

Ms. Tavares explains that the greater pressure on the commitment to bank debts comes with a weaker scenario of the expanded total income (the sum of income from work and other sources such as cash transfers transfers) and the increase in interest rates (as bank spreads anticipated the rise of the benchmark interest rate Selic). There is also the credit to families. “This credit continues to grow, including with an increase in emergency modalities, such as overdraft line of credit and revolving credit card, which have higher interest rates and put even more pressure on income commitment,” she says.

According to Ms. Tavares, this was already expected. But some points of uncertainty arise. The rise in inflation, for example, also ends up by causing households to resort more to “emergency credit”, says Ms. Tavares. “It can limit consumption a little more, but not in a way that slows growth.”

“The families are more pressed on the items of greatest need and in the end the payment for consumption or other bank debts, in general, is in the background, also pressing default”, notes Ms. Tavares. Tendências projects the commitment of average household income will rise 0.8 percentage points this year, compared to the average of 2020, to 22.7%.

For Sergio Vale, chief economist at MB Associados, the evolution of the economy seems a more relevant indicator for the course of household debt than the new cycle of high-interest rates. “Between 2004 and 2012 we had a very high real interest rate and still the debt grew. The most complicated, in fact, is a slow recovery in employment. At the same time, even growing less, the recovering activity also ends up collaborating for a marginal growth of debt”, he says.

Even if the Selic goes to 7,25% per year, it would be low for the historical standard, says Mr. Vale. What will be important to keep track, according to him, are bank spreads. “The Central Bank has acted a lot in recent years to decrease the bank spread, which has in fact fallen and is stable at this time.”

According to the credit director of a large bank, there are no signs of a major worsening in delinquency. The 30% share of the families’ income commitment, he says, is the limit they consider healthy. If it starts to point upwards, it will worry, but at the moment there is no such indication.

(Talita Moreira contributed to this story)

Source: Valor international