By: Dr. Mike Campbell
As the world gradually recovers from the global financial crisis, many leading economic nations are still at historically low interest rates. The concept behind this is simple: if central banks make “cheap” money available to the banking sector, then the banks in turn will be able to lend to business at affordable rates which will stimulate growth.
The Bank of England and the European Central Bank have left rates at 0.5% and 1% for almost two years now. However, in the UK and the Eurozone, inflation figures are above their target levels and there is a growing chorus of opinion suggesting that the banks increase their rates to choke of inflationary pressure, but any increase is likely to be incremental.
Spare a thought for Brazil. Last year, inflation came in at 5.9% and is expected to remain above the 5% level throughout this year. Industrial output came in at 0.2% for January which was considerably better that the 0.7% decline that had been expected on the back of a 0.8% contraction in December. As a whole, the Brazilian economy, Latin America’s biggest, grew by an impressive 7% last year. It is predicted to see a further 4.5 to 5% growth in the current year.
In a bid to curb inflation and to prevent the economy from overheating, the authorities have already pushed up interest rates by 1% this year in two stages. Currently, the Brazilian interest rate stands at a whopping 11.75%. This has attracted a lot of foreign money and served to push up an already over-valued Brazilian Real. A high Real makes Brazilian exports less competitive in importing markets, but the latest hike is likely to exacerbate this problem. Taking inflation into account, the rate is very attractive to investors who want to park their money somewhere, particularly if the Real continues to appreciate.