Brazil: Economic Recovery Hurt By Exorbitantly High Interest Rates


A new paper from the Center for Economic and Policy Research (CEPR) looks at Brazil’s unusually high interest rates. Brazil has the fourth-highest interest burden in the world (183 countries), even though ― unlike countries plagued by civil conflict and other risk factors ― Brazil faces little risk of default, and with more than $366 billion in international reserves, is not likely to experience balance of payments crises that could lead to runaway inflation.

“Brazil’s exorbitant interest rates are the result of decisions of the Central Bank, supported by a concentrated, powerful banking sector that has considerable political and market power,” CEPR economist and Co-Director Mark Weisbrot, who coauthored the paper, said. More than 44 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.

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:

In the immediate present, one of the most damaging aspects of Brazil’s high interest rates is the weight of interest payments in the national budget, in the context of the highly dysfunctional national debate over Brazil’s central government budget deficit. The increase in the interest burden of the debt since 2012 accounts for about half of the increase in the central government budget deficit.…

Alternatively, 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.

The paper notes that Brazil had 23 years (1980–2003) with very little growth of income per person, just one-fifth of 1 percent per year on average, and warns: “Brazil’s unique interest rate policies are a major part of the policy mistakes that, if not subject to serious and long-term change, could condemn the country to another very long period of profound economic failure.”


The Center for Economic and Policy Research (CEPR) promotes democratic debate on the most important economic and social issues that affect people's lives.

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