MercoPress. South Atlantic News Agency
Brazilian central bank lowers basic rate 0.25 points on more optimistic recovery data
Brazil's central bank cut its key interest rate for the first time in more than three years on Wednesday as a new center-right government's reforms fuel hopes of a recovery in Latin America's largest economy. The bank lowered the benchmark Selic rate by 0.25 points, to 14%, still one of the world's highest, and cited a dip in inflation and forecasts that a long recession -- Brazil's worst in a century -- is nearing its end. Read full article
Comments
Disclaimer & comment rulesThe LatAms just don't get it do they?
Oct 21st, 2016 - 02:11 pm - Link - Report abuse 0Why should anybody in business and wanting to expand take on loans at 20%, which is probably what would be charged by the lending bank?
Drop the rate to 5% and start the economy growing but keep the politicians sticky fingers out of the mix.
@ ChrisR
Oct 21st, 2016 - 10:43 pm - Link - Report abuse 0Lending at 5% when inflation is at 8.5% seems like a nice quick way to lose money.
I'm curious anyway, why do you think Brazil should do the opposite to the UK and lower interest rates to get the economy going, rather than raise them to curb inflation?
@ DemonTree
Oct 22nd, 2016 - 10:53 am - Link - Report abuse 0You haven't lived long enough to understand things, have you? :o)
What is driving inflation in Brazil?
Mr. Market is pissed off with the government corruption and the really high cost of bank loans, so they are not buying (lowering spending) and the velocity of money (the speed of turnover if you wish) is a factor when calculating inflation.
Yes, I know these are volatiles but what has really upset the UK metrics is the printing of money which screws any chance of stability resurfacing.
Brazil are not printing money, they move it through corruption which in itself creates distortions.
I certainly would not compare how the Canuck is ruining the Pound with any other country, especially one in SA. The US printing money is not a problem for them, it IS a problem for all countries who use or trade in the U$D, almost every other country in the world.
PS Mr. Market is in reality the purchasing public, you and me.
The only immediate benefit of reducing the prime rate to 14% (still high as hell) is that it will reduce the Federal Govt's public debt by R$ 7.5 billion/ year. It won't help small business very much, far less the individual on the street. On the other hand, the BNDES has a special line of credit for large business at interest rates lower than the official inflation....in other words the Brazilian public pays the cost of these cheap loans, without reaping the benefit.
Oct 22nd, 2016 - 09:58 pm - Link - Report abuse 0Outstanding debt on you checking account , or on your credit card, is over 500 % / year...so if anything is reducing inflation, it's pretty clear that it's the high cost of money, which in turn reduces consuption, as the great majority are unable to pay cash at sight.
@ ChrisR
Oct 23rd, 2016 - 09:21 pm - Link - Report abuse 0I've lived long enough to understand that handing out loans with an interest rate below inflation is not a good idea. In fact according to Jack Bauer the BNDES is actually doing this and the tax payer is paying for it.
According to news websites, a lot of the inflation in Brazil is caused by wages etc being indexed to the rate of inflation. So if inflation temporarily increases the effect is prolonged and amplified by a positive feedback loop. Wages rise, so companies increase prices to cover the cost, so inflation increases, so wages rise...
What you said doesn't make much sense as people not buying would tend to lower inflation if anything. That's the point of raising interest rates, to encourage saving rather than spending. It reduces inflation at the cost of slowing growth.
As for the UK, we know exactly what has screwed the chances of stability returning and it's not printing money, something the BoE has done plenty of times since the financial crisis.
As for ruining the pound, as an ex-pat you'd be better off if the pound rose against the dollar, which might explain why you're so keen to see it happen. But it's almost certainly better for the rest of us if it stays at its current level.
This is why the UK is not in the Euro. It's so the pound can fluctuate against it and against other currencies; if your currency is held at an artificially high level it harms the economy, as we've seen with Spain, Portugal, Italy, and most famously Greece.
@ Jack Bauer
Since you live there, what do you think of the theory that pegging wages, certain price rises etc to inflation has the effect of amplifying any rises in it?
It looks like Brazil is now suffering from stagflation, and the high interest rate isn't helping much. Why don't they offer the cheap credit to smaller businesses anyway, don't they pay big enough bribes? You'd think giving credit to small businesses would help the economy more after all.
And why can most people not pay for things in cash?
Pegging wages / prices to inflation, while almost inevitable, simply feeds it. But at some point, society as a whole has to be prepared to sacrifice , and to start adjusting salaries / prices , under inflation, in order to break the vicious circle.
Oct 23rd, 2016 - 11:33 pm - Link - Report abuse +1If people could see a light at the end of the tunnel, they might be willing to sacrifice, but when they see politicians wasting their money and legislating for their own benefit, they tend to become sceptical when asked to “share” the burden.
Currently, stagflation would define the situation correctly. The problem with reducing the prime rate to acceptable levels in the short term, is that it would most likely fuel demand (beyond offer), provoking increases. It's become a balancing act, whereby they need to cut the interest rate and open the money tap, without letting consumption get out of control....but that is unlikely to happen right now, given the crisis and the fact that most people are still wary of the day of “tomorrow”, prefering to save what they can for a rainy day.
I cannot but agree that cheaper financing for businesses would allow them to cut costs, become more competitive and to reduce unemployment, creating a virtuous circle....some 'cheaper' credit is available, but not to all. The main obstacle to cheaper credit is the banking system, whose interest rates are pure extorsion, but in their defence, they claim that the risk (of lending) is very high. If not mistaken, more than one-third of the population, currently has unpayable debt. In this scenario, their names become 'dirty' and they are unable to finance anything ; on the up-side, they're being forced to realize that paying at sight gives them more bargaining power and comes out far cheaper in the long run. The tax system is another major obstacle - besides loads of indirect taxes, inciding on all transactions and products, payrolls are taxed at 100 % plus...and worker rights make getting rid of them, prohibitive.
@ DemonTree
Oct 24th, 2016 - 02:00 pm - Link - Report abuse 0I posted
”so they are not buying (lowering spending) and the velocity of money (the speed of turnover if you wish) is a factor when calculating inflation.“
Please understand that, it might just alter your view.
@ Jack Bauer
”Currently, stagflation would define the situation correctly. The problem with reducing the prime rate to acceptable levels in the short term, is that it would most likely fuel demand (beyond offer), provoking increases. It's become a balancing act, whereby they need to cut the interest rate and open the money tap, without letting consumption get out of control....but that is unlikely to happen right now, given the crisis and the fact that most people are still wary of the day of “tomorrow”, preferring to save what they can for a rainy day.”
Yes, it's the Mr. Market effect alright. Pity the Brazil Nuts don't listen to people like you.
Have you thought of offering your services as Finance Minister? :o) (only joking - I know you have more sense than that).
@ChrisR
Oct 24th, 2016 - 07:24 pm - Link - Report abuse 0Besides the PT's penchant for corruption, they chose to ignore basic economic principles, forgetting that to every decision there's a consequence. For as long as revenue was high enough to cover their stealing and overspending, they managed to fool all their ignorant supporters; when revenue fell and crossed the rising curve of spending, that's when the sh*t hit the fan.
You're right, I wouldn't go near anything to do with govt.
Referring to one of DT's previous comments, “Lending at 5% when inflation is at 8.5% seems like a nice quick way to lose money”, he's absolutely right; not to mention that many, with access to these low interest loans (from the BNDES) would use the loans illegally ..as some actually did - for example, three years ago, one of Dilma's ministers was denounced for wangling a low interest loan from the BNDES for an investment company his son had just opened, then proceeded to invest it on the financial market, at double the rate. When payment came due, they just paid it off and pocketed the difference; at the time, the minister's son was hailed as financial wizard for turning a handsome profit in his first year of operation, and of course, the accusation was swept under the carpet. That's what you call “money for nothing”.
@ Jack Bauer
Oct 24th, 2016 - 09:31 pm - Link - Report abuse 0Didn't Brazil use some weird scheme with a virtual currency to control inflation in the past? To stop people expecting the prices to always rise and therefore demanding pay increases etc?
I assume things have not got that bad this time, but I can't blame people for not wanting to sacrifice when they see their politicians stealing from them and the same people probably caused the problem in the first place.
If consumption is unlikely to rise at present due to lack of faith in the economy, do you think it ought to be possible to lower the interest rate more? It seems like it's not doing much to control inflation anyway.
How did 1/3 of the population come to have unpayable debt anyway? Was it a lot easier to get cheap credit in the past? And that tax system sounds pretty broken. AFAIK indirect taxes are generally regressive, and encourage people to do things 'under the table' as well.
About the low interest loans, what you described is just what I was imagining. When I was at university, we got government loans with interest at the rate of inflation. One of my friends didn't need the money, but she took the loans anyway and put them in a high interest savings account (this was before 2008 when such things still existed). I don't think she made a huge amount but it was free money.
@ ChrisR
Since according to you I did not understand what you wrote, perhaps you should explain it differently?
@DT
Oct 25th, 2016 - 04:02 pm - Link - Report abuse 0Regarding what you call a 'weird scheme' used in the past, believe you are referring to the preparation for the 'plano real', the implementation of which started in March 1994 under Fernando H. Cardoso and was completed 4 months later, just before he was elected President (Oct '94). By what I remember, it consisted of creating what was named the URV ('Unidade Real de Valor'), whereby an initial exchange rate, equal to so many URVs to the US$, was established. Every day, the amount of URVs to the US$ was increased slightly, until, at the beginning of July, 2,750 URV's, equal to R$ 1,00, was the equivalent of US$ 1,00....this was done without freezing prices (avoiding repressed inflation), thus enabling the Govt to sever the link between inflation and wage/price increases....obviously, it wasn't as simple as I've made it sound, but the idea was to make the US$ and R$ values converge (increasing the value of the Real against the US$), without resorting to the same, failed methods used in previous attempts, by removing zeroes to the right of the comma, or sliding the comma to the left.
The SELIC (prime) rate WILL be reduced, but as I mentioned, it has to be done gradually, to 'feel' the market's reaction (recovery through increased production /salary mass, and not by flooding the market with cheaper money), to avoid a consumption boom.
Under the PT, the poverty 'bar' was lowered, to give the lower classes the false impression that they were climbing the social ladder ; with this, and reducing high taxes on a few selected, large consumption items, people went on a spending spree using plastic money. The PT eventually realized the problem they'd caused, but did too little too late, as they were only concerned with their popularity, so they raised the interest rate in order to curb spending, but one of the perverse consequences, as people were losing their jobs, was that they were unable to pay their bills.
@ DemonTree
Oct 26th, 2016 - 10:51 am - Link - Report abuse 0“Since according to you I did not understand what you wrote, perhaps you should explain it differently?”
I had given you the benefit of understanding Mr. Market and economics as it relates to Brazil. I am in my late sixth year of reading about it.
Try understanding what Jack Bauer has just posted.
@ Jack Bauer
Oct 26th, 2016 - 10:24 pm - Link - Report abuse 0Heh, maybe I shouldn't have called it a weird scheme, it sounds like one of those awful internet ads:
“Economists hate him!
Local man discovers 1 weird
trick to fix inflation forever!”
But Brazil is still using that currency, so I guess it worked. The thing I read said there was no actual cause of the inflation by that point, except for people's expectations which became a self-fulfilling prophecy. So by showing that the virtual currency remained stable they were able to convince people that inflation had stopped.
I've never understood why governments think encouraging people to borrow and spend will improve the economy. I suppose they are more interested in the short term boost than the long term problems it causes, but they must know it will come back to bite them in the end.
@ ChrisR
What Jack Bauer said makes sense, ie the interest rates need to be reduced slowly to avoid flooding the market with cheap money. Your plan to drop them to 5% is just the opposite, and the development bank that does give cheap loans has proved to be open to abuse.
I looked up your 'Mr Market'. Apparently it's a metaphor to illustrate the irrational behaviour of the stock market and how you can take advantage of it. I couldn't see anything at all about consumers and inflation.
@ DemonTree
Oct 27th, 2016 - 11:25 am - Link - Report abuse 01st par.
So what are they spending their money on, this development bank? Who owns this bank? Who owns the main consumer bank?
2nd par.
Yes, that's the 'headless chicken' version (you have seen my use of that phrase no doubt).
The other use is to demonstrate the power of consumers, though that is far from stable also.
Other:
Do you know when to buy gold? The last time I did that I made 29% profit in just a few months. Do you know when NOT to buy shares?
:o)
@ ChrisR
Oct 27th, 2016 - 05:58 pm - Link - Report abuse 0We're talking about interest rates and the economy, not investing. I assume since you didn't comment on it that you've changed you mind about 5% interest rates being a good idea for Brazil right now?
@ DemonTree
Oct 28th, 2016 - 11:00 am - Link - Report abuse 0No, the lower the interest rate the better, it is always a drag on the economy.
As for banks and whether it costs money to do this, so what?
Brazil need to expand the economy, this is the way to encourage Mr Market to buy and get the velocity of money going again.
If Brazil weren't so corrupt none of this would probably be necessary, but they are and there are costs associated with it.
The “plano Real” worked alright, and it was what allowed Lula to inherit a relatively good economic situation after 8 years of growth with dropping inflation. The PT is known for voting against everything and anything that does not have their brand on it ; they voted against the 1988 Constitution and the “plano Real” ; when the “Bolsa Família” concept was introduced, they voted against that too, claiming it was just a 'vote buyer' - after Lula took over, he was the one who used the “bolsa família” for exactly that, and strongly criticized those who denounced it...the infamous “before” and “after”, but unfortunately the average Brazilian has a short memory.
Oct 28th, 2016 - 04:30 pm - Link - Report abuse 0There was a moment when the PT must have realized that their populist policies were not working (helping the economy), because instead of investing in infrastructure (basis for any economic growth) they were throwing money at the poor. This made the poor classes suddenly feel 'rich', which stimulated consumption....with this consumption craze, instead of waiting to save money, they rushed to consume, and the only way was to take credit.....this snowballed in to the situation we have today.
As to your comment on 'self-fulfilling' prophecies, negative expectations usually tip the apple cart without there being any real economic reason for it.
Getting back to interest issue, of course a 5% prime rate would be good for the Brazilian economy, but productivity has to increase at a rate that is inversely proportional to the drop in interest, otherwise, as I said, prices and the cost of living will shoot up, fueling inflation.
Just to clarify : the BNDES, (development bank) only lends to business, not to consumers, but on this note, with the consumer banks charging rates of up to 15% per month on the more expensive type of loan (outstanding balance on checking accounts, credit card debt), is it bound to screw anyone whose salary is being adjusted by, perhaps 10% per year. It ain't easy.
@ Jack Bauer
Oct 28th, 2016 - 07:45 pm - Link - Report abuse 0Excellent post, as usual.
Managing the economy in a 'straight' country is never easy, managing it in Brazil is virtually impossible, BUT, and there is always a but, the way the economy is presently going is destined for serious stop / go effects of a chaotic nature and significant swings in actual numbers.
Much like the UK was when we had over powerful and stupidly led unions . Frankly, I cannot see the present political system of Brazil being able to enforce the sort of very strict controls needed on pay, prohibition on wildcat strikes and improvement in product quality that is at the heart of moving the economy forward.
This is further exacerbated by the dreadful drug and crime situation, the elimination of which seems to be beyond the ability of any existing political structure to achieve.
Perhaps it is time to allow the military another chance?
@ Jack Bauer
Oct 28th, 2016 - 09:56 pm - Link - Report abuse 0'the infamous “before” and “after”'
That sounds all too familiar; it's a common trait of politicians, but the PT sound especially bad. Encouraging people to borrow when they can't afford it is certainly not helping them, and it must have made the effect of the current high interest rates a whole lot worse.
It scares me that populism seems to be spreading to Europe and the US now.
About the interest rate, I agree. it's a balancing act between stimulating the economy and causing inflation, but unfortunately with stagflation you really can't win, and with a large - and high interest - national debt Brazil does not have much room for manoeuvre.
And ouch to those interest rates. Sounds like paying for everything in cash would be the most sensible thing to do, but it's certainly not convenient.
@ChrisR
I can't even tell if you are serious now.
First you complain on here that the rate is too low in the UK, and then you say the lower the interest rate the better!
But congrats on managing to both contradict yourself AND be wrong both times. There is an optimum level for interest rates depending on the economy, inflation etc, and this is not generally zero. And the rate in the UK is currently low to stimulate the economy and because inflation has recently been zero or negative.
As for whether it costs banks money to lend at low rates, I really shouldn't have to tell you that banks are in the business of making money, not losing it. Are you proposing the government should force private banks to lend money at a loss(!)?
And yes, they need to expand the economy, but they need to avoid runaway inflation and an unsustainable debt burden while doing it. Try understanding what Jack Bauer has posted.
As for giving the military another chance, have you no regard for democracy? It makes your complaints about Remain supporters seem remarkably hypocritical.
DemonTree
Oct 29th, 2016 - 10:48 am - Link - Report abuse 0:o)
Military intervention ? interesting topic, many in favour, many against. Obviously it would only occur as a last resort, but those in favour of it are fed up to their back teeth regarding the mess the civilians have caused after being restored to power, with the exception of FHC's two terms (1995-2002, incl). Those against it are those who either were too young to remember, or were not born yet, but believe in all the lies - am not going to deny that the military were severe with those who spoke up against them, and especially against those that rose up in arms...presumably, the latter knew what they were getting into, so I don't have much sympathy for them. But on the up-side, the military did a good job at improving Brazil's poor infrastructure, which carried Brazil into the 2000's. But with little investment from then on, it impacted growth negatively. Although Brazil wasn't doing too badly by 2003/2004, with an adequate infrastructure it could have done far, far better.
Oct 30th, 2016 - 08:00 pm - Link - Report abuse 0After that, most govts did nowhere near what they should, or could have. Another positive effect of the military was that corruption, which obviously existed, was a fraction of what it is today...probably because the military took the decisions, without giving the politicians many opportunities to stick their hand in the til. All 5 military presidents left power as poor as when they took office. The reasons why the military took over in the first place (in 1964) is another story, but overall, their period in power was relatively calm, politically speaking, and people could get on with business, as usual....with the exception of those bent on transforming Brazil into another Cuba. As far as I was concerned, I was not prejudiced in any way by the military's presence, as neither were most of the population or, the silent majority.
At the moment, Brazil's best bet is to believe Temer is going to do what has to be done, no matter how unpopular, and hope he succeeds.
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