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Brazil’s Record Low Key Interest Rates Are Still the Planet’s Highest

Brazilian interest rates

Brazilian interest rates Brazil has lowered its key interest rate, the Selic, to 12% a year, the lowest ever. This is the 16th consecutive reduction of the Selic since September 2005 and still, even when the inflation is taken into account, Brazil's benchmark interest rate is  8.3%, meaning that Brazilians have the highest interest rates in the world followed by Turkey with real annual interests of 7.6%.

The Copom, the Monetary Policy Committee of Brazil's Central Bank, just cut interests 0.5% this Wednesday, June 6. Since September 2005 when rates were reduced from 19.75% to 19.50%, the Selic has been lowered 7.75%, 1.25% of which during this year. According to Up Trend, a consulting firm, the world's real average interest rate is 2.3%.

There was no unanimity in the Copom's decision. While five members of the committee voted for a 0.5% cut, two of them wanted a more modest 0.25% reduction.

It seems that the continued decline of the dollar vis í  vis the 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.

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 their countries.

According to Brazil's Central Bank, US$ 28 billion in foreign currency had already entered Brazil by the end of April, an amount not far from the US$ 37.27 billion invested in the country by foreigners the whole of 2006, which was a record.

Central Bank officials complain that all the interest rate cuts in the last two years were not enough to heat up the Brazilian economy to a level of other developing countries. Experts argue that it takes about six months before an interest reduction can be felt in the economy.

Before yesterday's Copom meeting the Iedi (Institute of Studies for Industrial Development) released a note saying that a 0.5% cut wouldn't be enough to discourage foreigners to speculate: "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, like 0.75 %."

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  • AES

    There is more profit to be made out of the foreign goods, same quality cheaper price. They will sell it wat what the market will bare.

    Manufacturers are outsourcing the manufcaturing. The price saved on labor, regardless of duty make it economically feasable not to manufacture in Brazil.

    They price of the Real was never relevant to the exportation of these goods, as the difference between $R1.96 and $R2.20 in insignificant.

    Tens of thousands of jobs in shoe making and textiles were lost to outsourcing in the U.S. A country can only produce what it can profit by. Apparently it is no longer competitive in shoes or textiles in the global economy.

    Brazil will sell other things and create other jobs. Things change, people get hurt, people benefit. There are some companies that sell only products made in the the U.S., but Wal Mart is the greatest destroyer of jobs in the U.S. Not only do they import, but they sell at low margines of profits. That has yet to take hold here, discount selling on a massive scale.

    Still the economy, employment is the strongest it has ever been in the U.S. Nations adjust. Supply and demand. Things are overpriced generally in Rio. It is the 40th of 144 of the most expensive, highest cost of living, cities in the world.

    Fly to China use the leverage of the todays strong Real, import the product, and sell directly to the public at discount prices.

    A pair of Nike shoes sold for $R200 can be bought in China for $R20. It is nothing but greed.

    Dont buy the product if it is too expensive. Let the store eat their greed.

    Change the tariffs, the duties are too high. They are killing certain sectors of the economy.

  • AES

    Ch.c: Wall Street Journal
    Brazil’s Bull Draws Fans
    Market Wins Over Skeptics
    With Newfound Stability
    By ANTONIO REGALADO in SÀƒ£o Paulo, Brazil, and JOANNA SLATER in New York

    Economist Robert Shiller explained the 2000 stock-market slide (before it happened). He also gave an early warning about a retreat in U.S. home prices.

    But there is one hot market he still likes: Brazil.

    This year has seen mixed performances in the stock markets of several emerging giants. China looks increasingly like a speculator’s game, India’s returns have been lukewarm, and Russia’s benchmark index has lost ground.

    Meantime, SÀƒ£o Paulo’s Bovespa index has climbed 17% this year — and gained 350% since 2003. Brazilian markets were closed yesterday for the Corpus Christi holiday.

    Brazil’s economy has long been one of booms and busts. But the country recently has made big strides to distance itself from its past. The government has reduced its foreign debt and built up dollar reserves. Exports have surged.

    Brazil has tamed inflation and, unlike many nations, is cutting interest rates. On Wednesday, the central bank lowered interest rates by half a percentage point to 12%, the 16th rate reduction in the past 21 months.

    Brazilian stocks are doing so well that Mr. Shiller, a Yale University economist whose 2000 book “Irrational Exuberance” laid out a theory of how speculative market bubbles happen, recently took a closer look. His conclusion: The enthusiasm seems to be merited.

    “Things are really looking good. Inflation is stable, the currency is strong” and there is wide popular support for the government, says Mr. Shiller, who loaded up on stocks here a few years ago. “People see this as a stable place to invest.”

    Like other emerging markets, Brazil has benefited from a global economic environment that has encouraged investors to roam widely in search of returns.

    Any sign that U.S. or European investors might lose their appetites for riskier investments abroad would hurt Brazilian stocks. Still, many investors remain optimistic that Brazil’s economy is on the right course.

    Global investment banks such as Citigroup, Merrill Lynch and UBS are recommending that investors be “overweight” in Brazilian shares — in other words, that they invest more money in the country’s stocks than the amount suggested by the emerging-market benchmark index.

    “Bringing inflation and the budget under control has always been a problem for Brazil,” says Mark Gordon-James, a portfolio manager at Aberdeen Asset Management , which has $9 billion invested in emerging markets. Mr. Gordon-James says his firm is investing in smaller Brazilian companies like Localiza, a car-rental company.

    Lately there is another benefit for foreign investors: the strengthening of the Brazilian real. Since the start of the year, the real has gained 9% against the dollar. That increase boosts returns for foreign investors, because every Brazilian real earned can then buy more dollars. It is also good news for some Brazilian companies, such as airlines GOL and TAM, because their main cost, fuel, is denominated in dollars, making it cheaper for them in local-currency terms.

    Foreigners are also keen on Brazilian bonds. “It’s one of our largest holdings,” says Michael Gomez, co-head of emerging markets at bond giant Pacific Investment Management Co. Last month, Standard & Poor’s elevated Brazil’s foreign-currency bonds to one step away from investment grade, a benchmark Mr. Gomez says he expects Brazil to reach in the next year.

    Many in Brazil are convinced things have changed, this time for good. In May, Brazilian President Luiz InÀƒ¡cio Lula da Silva said the economy was living a “magic moment.”

    The International Monetary Fund expects the Brazilian economy to grow 4.4% this year and 4.2% in 2008, strong by Latin American standards, though not near rivaling Asian giants.

    Of course, skeptics say Brazil has seen good economic times before, only to enter a crisis. And precisely such “new era” thinking — the belief that market fundamentals have somehow

  • AES

    Corporate profits have more than doubled over the past four years
    The overall value of Brazilian equities crossed the $1-trillion line at the beginning of the month, buoyed by a market that has climbed 17 per cent so far in 2007 in the local currency. A number of factors have propelled Brazil into the big league, not the least of which are corporate profits that have more than doubled over the past four years, rising metal prices, a robust economy that many think may grow even faster this year than the 4.1-per-cent consensus projection and a currency gain over the past year that even surpasses that of the high-flying Canadian dollar.

    Rio ranks 40 out of 144 countries ranking the cost of living. There is little relationship between Brazil’s current interest rate being ‘the highest on the planet’ JINGOISTIC at least and the reality of economic life on the ground. Brazil’s quality of life will improve when the judicial system becomes functional instead of dysfunctional. The Federal Police begin to perform, its time for the courts to be reformed. Very few people are responsible for the misery of millions. This is a Democracy it is governed by the people not by the few. With a little tweaking and a little prosecution and incarceration Brazil could become whatever it chooses. It is not Brazil that chooses, but a few Brazilians. ‘The times they are a changing’.

  • AES

    The business of just government is the business of the people. It is the large profits that enable companies to hire, increased volume will reduce retail prices, an interest rate of 19.75 is crippling to an economy. 12% will cause the Real to devalue. The lower the interest the more the real estate market expands, new housing. Land is still a bargain in Brazil. Getting to it is another matter. So hugh tracts of land are being bought by foreign investors as well as domestic investors. Nothing is static. This is a dynamic economy expanding, not contracting. It would be nice if the agents of government, like the Judicial was as dynamic.

    Even China has courts of justice under laws of economy as opposted to totalitarian ideology, as a consequence of the extraordinary decade long economic expansion.

    When more people are able to afford justice, the more often justice makes her appearance.

  • João da Silva

    To:AES
    Happy to inform you that the Prof and the Admiral are still alive and kicking. In fact, it was GTY who located them (reluctant,but formidable ally of ours).

    So you better relax ,have some cold ones and continue doing your good work 😉

  • João da Silva

    [quote]Many in Brazil are convinced things have changed, this time for good. In May, Brazilian President Luiz InÀƒ¡cio Lula da Silva said the economy was living a “magic moment.”
    [/quote]

    I was watching the news tonight and one of the items that caught my attention was that about the closure of a company in RS (Rio Grande do Sul) that has 20 plants all over the state and manufactures shoes to cater to domestic and foreign markets.It is immediately going to close its plant in a small city in the interior adn by the end of June will cloe all the otehr 19 plants. The job loss is around 4000.

    The reasons are a) Strong Real b) The fierce competition from PRC. This did not come as a surprise to me as I have been reading or hearing stories everyday about the situation in other manufacturing sectors also.

    Not that the consumers are benefited by the import of shoes and graments from China. The retail price are the same or higher than the Brazilian made ones. Last week, I went to a well known Retail store with my wife. A LadiesÀ‚´ top made in Sri.Lanka costs around 246 Reais!. Knowing a bit about the manufacturing costs in that part of the continent, I was astounded at the final price charged to the Brazilian consumers.

    Of course, the Brazilian economy is indeed living in its magic moments and I hope it doesnt turn out to be a real magic show!!

  • João da Silva

    ch.c
    [quote]TODAY your inflation is at just above 3 %[/quote]

    The inflation rate is just above 3%? You must be hallucinating.Just study the rate during the first 3 months.

  • CH.C.

    to the idiot—AES !!!!!!!
    If was NIT the 19,75 % rate that crippled your economy……contrary to what you suggest !
    At that time, in 2005, you had inflation of 7 % plus, making a differential of 12,75 %.
    In May 2003 your inflation was at 13 % plus, and your Selic rate was at 26 %, making a differential of 13 %.
    TODAY your inflation is at just above 3 % and your Selic rate, after 15 rate cuts, was put at 12 %, or 9 % ABOVE INFLATION !!!!!

    Yesssssss…..still the world highest interest rates….after inflation !
    Argentina, for example has a lower country rating than Brazil. Their inflation os at 8,8 %-They just issued today their first fixed
    rate government borrowing in local currency. Rate 11,7 %. Or 2,9 % above their inflation rate !

    Guess now who is the most stupid ! the one with a lower rating paying 2,9 % above inflation or the one with a higher rating and paying
    9 % above inflation.
    If your answer is the one paying 2,9 %, then Brazil may as well pay a still higher rate !!!!!

    Guess now why Argentina had an economic growth rate of 3 times the Brazil rate ?????

    Yesssss…..your government is taking you for a ride, and YOU applaude them.

    Impressive !!!!!

  • Guest

    “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 their countries.”

    Just as I said before, the flood of dollars into Brazil is not beneficial to to Brazilians and cutting the interest rate by 0.5% is not enough and will not stem the inflow of dollars. In my opinion a cut of 0.75% as stated at the end of the article is not enough either. I think a cut of 1.0% until the interest rate gets to 9.0% is much more adequate. At that point further cuts could be at a much slower pace.

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