Brazil – rapid fire with interest rate rises.

Brazil’s inflation rate is now at 10.25% from the previous year which is well above the target rate of 3.75% for 2021 – their target for 2022 is 3.5%. To counter this increase in prices the Central Bank of Brazil have been extremely aggressive with interest rate rises and since 17th March 2021 they have increased the benchmark Selic rate by 575 basis points which leaves interest rates currently at 7.75%.

This contractionary monetary policy is in response to higher prices and it is hoped that the increase in cost of borrowing and the higher return for saving will lead to a reduction in aggregate demand. However one has to be dubious about the level of savings in the economy and whether the return you get on interest in the bank outweighs the increase in the level of prices.

Political events look to destabilise the economy even more. There are concerns that an increase in government spending on welfare will fuel further inflation as President Bolsonaro seeks re-election. The so-called fiscal “ceiling” limits budget increases in line with inflation and is regarded as a pillar of the country’s economic credibility.

See table and graph below showing Selic rate rises.

Source: Central Bank of Brazil
Brazil’s Inflation Rate

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s