MercoPress. South Atlantic News Agency

Brazilian real interest rates are the world's highest

At the beginning of June Brazil lowered its key interest rate, Selic, to 12% a year, the lowest ever and the 16th consecutive reduction since September 2005. But still when inflation is taken into account, Brazil's benchmark real interest rate is 8.3%, the highest in the world followed by Turkey with 7.6%.

Since September 2005 when Copom, the Monetary Policy Committee of Brazil's Central Bank, reduced rates from 19.75% to 19.50%, the Selic has been lowered 7.75%, of which 1.25% this year. The world's real average interest rate ranges 2.3%. According to analysts the continued decline of the US dollar vis à vis the Brazilian currency Real has convinced the majority of the Copom members to accelerate the rhythm of cuts. Copom's next meeting will happen on July 17 and 18. But high interest rates are not bad for everybody: national and foreign speculators love it. Investors from all over the world are putting their money in Brazilian stocks, which are multiplying their money much faster than in their countries. According to Brazil's Central Bank at the end of April, 28 billion US dollars had already entered Brazil, an amount not far from the record 37.27 billion for the whole 2006. However Brazil's Central Bank economists feel frustrated that interest rate cuts in the last two years have not been enough to speed up the Brazilian economy to the level of other developing countries which on average have been growing at double the pace. But the massive influx of US dollars helps to prop the Real, making imports increasingly cheaper and choking Brazilian exports. Brazilian industry and farmers have been lobbying strongly for a higher US dollar. Retailers are also complaining that high interest rates limits financing of consumers' credit. Before the latest Copom meeting the Brazilian prestigious think tank IEDI (Institute of Studies for Industrial Development) released a note arguing that a 0.5% cut wouldn't be enough to discourage foreign "speculation". "To have an impact on the expectations concerning the rate of exchange and in order to reduce the Central Bank's number of interventions, which are costly, we will need a larger reduction, in the range of 0.75 %", said IEDI. However the International Monetary Fund only recently praised the performance and management of the Brazilian economy during the last few years and forecasted that the strong Brazilian currency Real offers more opportunities to open the economy both financially and commercially. "We are proud of the performance of Brazil", said IMF Managing Director Rodrigo de Rato adding that since 2002 there has been "a dramatic change for good, in Brazil" because of the "very positive implementation of monetary and fiscal policies".