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Despite already having the highest interest rates of any major economy, the Central Bank of Brazil raised its Selic base interest rate half a percentage point this week. In an attempt to control quickening inflation, the Central Bank raised the rate for overnight lending to 11.25% from the previous 10.75%. The move is likely to be unpopular with domestic businesses and consumers who will face an increased cost of borrowing money. Brazil’s inflation rate was 5.9% in 2010, which was a sharp increase from 4.31% in 2009. Surging consumer demand, huge increases in government spending, and soaring food prices have contributed to the nation’s inflation.

QUESTIONS FOR DISCUSSION:

  1. The higher interest rates in Brazil will likely lead to an increase in “hot money” from foreign investors seeking a higher rate of return than is available in low interest rate countries. How can Brazil effectively address any sudden surges in foreign capital flows? What would be the advantages and disadvantages of imposing capital flow restrictions?
  2. The increase in interest rates and subsequent flow of hot money is likely to put upward pressure on the value of Brazil’s currency. How will an increase in the value of its currency help or harm Brazil’s economy?
  3. Brazil’s monetary policies and fiscal policies seem to be moving in opposite directions as the nation needs to do more to limit government spending to help control inflation. How can fiscal policy be used to help control Brazil’s inflation?

SOURCE: Murphy, T. (2011, January 20). Brazil moves to curb inflation. Wall Street Journal, p. A12. (Retrievable online at: http://online.wsj.com/article/SB10001424052748704590704576092471442713938.html)

RELATED ARTICLE: Prada, P. (2011, January 18). Brazil rates are focus as inflation edges higher. Wall Street Journal, p. A14. (Retrievable online at: http://online.wsj.com/article/SB10001424052748704029704576088074265215368.html)

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