Forex Blog: Currency Trading News & Analysis.

May 23rd 2005

Brazil raises interest rates

Brazil has raised its interest rate to 19.75%, which in real terms, is the highest in the world. Brazil’s Central Bank bank is determined to avoid the hyperinflation of the early 1990’s, which peaked at 2500%.  It has set an inflation target of 5% for the year, 3% below the current rate of 8% and will stop at nothing to hit this target. The Central Bank includes many goods which are regulated by the government in the models it uses to forecasts inflation. This approach is flawed because the government is unlikely to respond to interest rate pressures when setting prices for certain goods, namely utilities. Moreover, inflation has become a self-fulfilling prophecy as foreign investors have flocked to Brazil en masse, lured by sky-high interest rates. The Wall Street Journal reports:

A number of economists think Brazil needs to readjust its inflation targets and also better control government spending. Brazil’s debt is so huge that interest expenses put the country deeply in the red. Indeed, when interest expenses are factored in, the country runs a deficit of 2.6% of GDP.

Read More: Brazil raises interest rate to 19.75%

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Posted by Adam Kritzer | in Central Banks, Exotic Currencies | No Comments »

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