Short-term views on rates and inflation: Interest rates were cut to an unprecedented 2% in 2020, the lowest level in history. A weak FX rate, rising inflation and concerns over fiscal stability have led to expectations of relatively quick policy rate normalization. On 15 March, the Monetary Council increased the policy rate by 75bp to 2.75%. HSBC expects a 250bp increase in 2021 and another 150bp in 2022 to 4.5% and 6.0%, respectively. 

Impact on NIMs: Surprisingly for a market with considerable concentration (five universal banks for a population of 213 million people with no medium-size institutions), Brazilian NIMs are fairly insensitive to rates at least in the short term; over the past 15 years, there has been a decline in NIM, mainly due to a change in mix, with the growth of secured lending, especially mortgages, but it is only slightly correlated to the interest rate cycle as can be seen in 2013-17. The main reasons are elevated reserve requirements and high operational costs in a continental country that limit the attractiveness of deposit taking. Nevertheless, interest rates at 2% would end up putting pressure on the high margins for SMEs, credit cards and other retail products so the normalization will prevent more intense reductions. We expect NIM to decline slightly in 2021 and recover in 2022, more due to asset mix than rates themselves.