Brazil: Exorbitantly High Interest Rates Remain Drag On Economic Growth

Brazil’s exorbitantly high interest rates remain a drag on economic growth, an updated report (PDF) from the Center for Economic and Policy Research (CEPR) finds.

Despite recent cuts, Brazil still has the fourth-highest interest burden in the world (183 countries), with interest payments on the public debt estimated at 7.6 percent of GDP, even though ― unlike countries plagued by civil conflict and other risk factors ― Brazil faces little risk of default, and with more than $360 billion in international reserves, is not likely to experience balance of payments crises that could lead to runaway inflation.

“It is remarkable that Brazil’s Central Bank maintains such high interest rates even in the midst of a prolonged economic recession,” economist and CEPR Co-Director Mark Weisbrot said.

Brazil’s economy remains in recession, having shrunk 3.8 percent in 2015, and another 3.6 percent in 2016. Despite this economic weakness, the Central Bank of Brazil began cutting its benchmark Selic rate only last quarter — in the face of sharp economic collapse ― from the 14.25 percent where it had been held since mid-2015. This continues to represent tremendously tight monetary policy.

“While the nominal Selic rate has recently been cut, it is important to note that the real Selic rate (adjusted for inflation) is actually higher than it has been at any time since December 2008,” the paper notes.

More than 46 percent of Brazilian government bonds are tied to the Selic rate, the policy rate set by Brazil’s Central Bank. This rate has been one of the highest such policy rates in the world for decades. Since January of 2003, the nominal Selic rate has averaged 13.25 percent and the real rate (adjusted for inflation) has averaged 6.14 percent.

Brazil’s largest banks now control more than 70 percent of the commercial banking system’s total assets. The safe, guaranteed return from government bonds ― not only the high Selic rate, but other bonds that offer protection against inflation or changes in the exchange rate ― are an enormous source of profitability for Brazil’s financial sector. For the years 2003–2015, the profits of the four biggest banks rose by 460 percent ― from 5 billion reais to more than 28 billion reais.

The paper notes: “Lower interest rates could help create the fiscal space for the significant economic stimulus Brazil needs to help spur an economic recovery. Instead, the government has gone in the opposite direction, achieving the passage of a constitutional amendment to hold real (inflation-adjusted) federal spending constant for the next 20 years.”

“High interest rates continue to narrow the range of options available for Brazil to exit from recession,” Weisbrot said. “And considering that the government seems committed to a path of austerity, it appears likely that Brazil’s economic downturn will continue.”