In an age where low and negative interest rates dominate the central banking scene for most of the developed world, one major nation has a target interest rate of 14.25%. The country in question has been all over the news in the past few years, from the World Cup and the Olympics, to the impeachment of a president and a deep recession. It is Brazil whose official interest rate stands at 14.25%, which is entirely counterintuitive given the information that Brazil is mired in a deep recession. Brazil has to maintain such a high official interest rate due to the fact that they are facing issues with inflation that have persisted for years. Since 2000, Brazil has only had three years where average inflation in the country ran below 5%, and in both 2015 and year to date 2016 Brazil has seen inflation run above 9%. The inflation issue has hampered Brazil’s ability to encourage growth through monetary policy and as such Brazil’s recession, which now spans over 2 years dating back to 2014, has persisted. In recent months, however, Brazil’s economy has hit several key targets and as such a rate cut is officially on the table.
Brazil has seen inflation in food decline from high levels, while overall inflation has also seen a moderate decline. Furthermore, Brazil’s central bank now projects inflation at 4.4%, which is below the government target for inflation. Additionally, while economists predict Brazil’s economy to actually expand in 2017, several rate cuts throughout the end of 2016 and the whole of 2017 will help to boost growth. These developments and Brazil’s potential implementation of rate cuts are a huge development in the world of emerging markets. At a time when other BRIC members (the BRIC countries are a group of large emerging economies that includes Brazil, Russia, India, and China) China and India continue to have substantial growth, Brazil and Russia have struggled with economic contraction and differing levels of geopolitical stress. If Brazil’s economy begins to show more improvement and the central bank is able to cut interest rates it would be a huge development in the emerging world and would represent a significant divergence from the past few rocky years.
Overall what is perhaps the most interesting aspect of this situation is the showcasing of the difference between economic conditions in the developed world and emerging world. In the developed world countries are dealing with negative interest rates and fears of deflation, whereas in Brazil the concern deals with high inflation and how much to cut rates to spur growth. Perhaps the closest parallel between the two worlds is the tepid growth in Brazil as well as large portions of the developed world. Time will tell if Brazil’s economy truly begins to improve to the point where significant rate cuts are enacted, but for now it appears that he Brazilian central bank is willing to move in that direction.