Brazil's Economy in a 'Quagmire'... Household Debt Hits Record High

As Interest Rates Rise Due to Inflation Issues, Personal Debt Repayment Burden Increases... Concerns Over Reduced Consumption and Economic Impact

[Image source=EPA Yonhap News]

ㅁ

[Asia Economy Reporter Park Byung-hee] It appears that the Brazilian economy is sinking into a dilemma. The Central Bank of Brazil is facing a situation where it is difficult to avoid a contraction in consumption regardless of whether it adopts a tightening or easing stance in its monetary policy.

Due to the global logistics crisis and the resulting inflation risk, the Central Bank of Brazil has significantly raised the benchmark interest rate this year. This was out of concern that inflation could suppress consumption. However, now the increase in the benchmark interest rate has raised households' loan interest burdens, which is expected to weigh on the economy by reducing household consumption.

Bloomberg reported on the 27th (local time) that household debt in Brazil has soared to an all-time high amid the Central Bank of Brazil's successive interest rate hikes.

According to data released by the Central Bank of Brazil on the same day, as of June, the household debt-to-income ratio stood at 59.9%, the highest since the Central Bank began compiling related statistics in 2005. The debt ratio increased by 10.6 percentage points compared to a year ago.

The reason households continue to increase borrowing despite rising interest costs is attributed to reduced income due to the prolonged COVID-19 pandemic. According to the Central Bank, increases in credit card payments and auto purchase loans were identified as the main factors behind the rise in household debt.

From the Central Bank's perspective, despite the risk of rising inflation and increasing household default risk, it is in a position where it must raise the benchmark interest rate. There are concerns that the increased household loans will eventually lead to a rise in personal bankruptcies.

The personal bankruptcy rate stood at 4.2% as of August, showing no significant change yet. However, JP Morgan Chase pointed out that as interest costs rise further, the high debt ratio could become an obstacle to economic recovery.

While major emerging countries have raised benchmark interest rates this year, the Central Bank of Brazil has raised rates particularly aggressively. This is because the inflation rate, which was 4.56% in January, surged to 9.68% in August. Brazil's benchmark interest rate, which was 2% at the beginning of the year, has now risen to 6.25%.