Brazil’s Copom (the Monetary Policy Committee at the Central Bank) for the sixth consecutive month, has kept the country’s basic interest rate at 8,75%. The rate is known as the Selic and it is technically the nominal interest rate.
The next meeting of the Copom is scheduled for mid March and no changes in the Selic are expected before then.
However, the real interest rate in Brazil, which is the Selic after projected inflation for the next 12 months is discounted, is estimated at 4%, which is the highest rate among the 40 developed and developing nations used by UpTrend Economic Consultants for its world ranking.
In the latest UpTrend ranking of countries by real interest rates Brazil is once again back on top of the list with the highest real interest rate in the world.
Here’s why (hint: the Brazilian economy is not to blame!): for the last nine months China had the dubious distinction of being at the top of the list, but due to a recent spike in Chinese inflation Brazil has now risen to the top followed closely by Indonesia.
Fed’s Swap Line
In the dark depths of the international financial crisis in October 2008, the Federal Reserve of the United States extended temporary reciprocal currency arrangements, known as swap lines, worth US$ 30 billion to Brazil along with Mexico, Korea and Singapore “… four large and systemically important economies,” in the words of the Fed.
In practical terms this was not a loan, but a precautionary measure designed to help improve liquidity conditions and “mitigate the spread of difficulties in obtaining US dollar funding.”
In other words, the objective was to ensure that if the Brazilian economy needed dollars they could be made available through a currency swap (dollar and real).
This swap line arrangement is scheduled to terminate on February 1st. The Brazilian Central Bank, after consulting with monetary authorities in other countries, has decided not to renew it.
Brazil did not need the dollars. In a note, the Central Bank explained that as international financial markets are now operating satisfactorily, arrangements to deal with liquidity restrictions or problems on the Brazilian exchange rate market “…are no longer necessary.”