Brazil’s Quiet Credit Revolution: Lula’s New Balancing Act

By: Navya Dronamraju

Photo by Pila Olivares/ Reuters 

Brazil has quietly enacted one of its most consequential financial reforms in decades by abolishing the long-standing reserve requirement on savings deposits. For years, Brazilian banks were required to hold 20% of their savings deposits as reserves at the Central Bank, a rule designed to safeguard liquidity and smooth credit cycles. President Luiz Inácio Lula da Silva has eliminated the rule, instantly freeing around 150 billion reais (about $26 billion USD) in previously locked deposits. These funds are expected to be redirected toward real-estate lending, in what the administration hopes will stimulate growth without undermining monetary discipline or reigniting inflation. 

The economic rationale is straightforward but strategic. With Brazil’s benchmark interest rate, the Selic rate, standing at 15 percent, among the highest policy rates globally, traditional levers of stimulus remain constrained. Additional fiscal expansion would risk breaching the government’s new fiscal framework, while interest-rate cuts could undermine inflation credibility. In contrast, mobilizing bank reserves provides a structural way to expand credit supply without changing the stance of monetary policy, since the policy rate remains unchanged and liquidity is drawn from existing deposits. This measure seeks to revive credit intermediation by strengthening the asset and liability positions of financial institutions to enhance their lending capacity (balance-sheet channels) rather than through overt fiscal expansion or monetary easing. Improving banks’ balance sheets by reducing reserve constraints or freeing up capital, for instance, is expected to stimulate credit supply without direct state spending or changes to policy rates. The policy aims to unlock dormant liquidity to ease Brazil’s persistent housing shortage, steering private credit toward a sector that is both economically strategic and politically resonant. With an estimated housing deficit of roughly 6 million units, expanding mortgage credit and construction financing remains a central lever for inclusive growth and employment generation in Brazil’s urban economy. 

Nevertheless, the initiative carries significant risks. Critics warn that loosening reserve requirements could weaken monetary transmission and complicate the central bank’s ability to anchor inflation expectations. An expanded credit base may blunt the impact of policy rate adjustments on lending conditions, thus diluting the interest rate channel through which monetary policy restrains demand. There is also skepticism about whether commercial banks will channel the newly available funds toward productive mortgage lending rather than higher-yield consumer or speculative credit. Brazilian banks remain conservative in their risk appetite, and the reform’s impact will depend less on regulatory intent than on how banks adjust their lending and portfolio allocation decisions. Without clear incentives or credit guarantees, the freed liquidity may not reach the intended sectors. 

This approach reflects a wider shift in emerging market policymaking. The significance of the reform extends well beyond Brazil’s borders. Across emerging markets confronting the global “higher-for-longer” interest-rate environment, conventional policy tools have become politically and economically constrained. According to Gopinath, monetary easing risks capital flight, while fiscal stimulus risks inflation. Structural credit reforms, or adjustments to the underlying mechanisms through which banks create and distribute credit, offer a third path: channeling targeted liquidity to strategic sectors while maintaining macroeconomic discipline. 

In this sense, Brazil is emerging as a pioneering model of pragmatic innovation within macroeconomic orthodoxy. Other emerging economies are experimenting with similar approaches: Mexico has debated reforms to expand housing finance through initiatives like the National Housing Program and Infonavit’s efforts to broaden mortgage access, while Indonesia has encouraged state-bank lending toward green industrial projects under its Green Taxonomy framework and the state-directed “green credit” programs. Both countries’ policies signal a move away from fiscal expansion toward financial innovation as the engine of inclusive growth.  

The reform underscores a deep intellectual shift in emerging-market policymaking: the quiet assertion that emerging markets can innovate within orthodoxy, not just against it. In this sense, Brazil’s quiet financial revolution shows that orthodoxy need not be imported wholesale – emerging markets can redefine it to make stability and inclusion mutually reinforcing.

The views expressed in this publication are the authors' own and do not necessarily reflect the position of The Rice Journal of Public Policy, its staff, or its Editorial Board.