3 Reasons Why Rates Will Rise In Brazil
Banco Central do Brasil will meet on July 20th to decide the fate of the country’s interest rates once again. Although the country’s top bankers can leave rates on hold, they will likely raise them by another 25 basis points – increasing the benchmark rate to 12.5%. The decision would be in line with market expectations as the central bank is expected to raise rates by another 75 basis points before the year’s end – supporting more demand for Brazilian reals.
Here are 3 reasons why you should expect this inevitable rate hike:
1. First and foremost, the economy continues to grow. Although the pace of growth has slowed considerably since last year, the Brazilian economy is expected to expand at a rate supportive of rising consumer prices. The Brazilian economy is expected to grow by 4-5% this year, down from 7.5% last year. A higher interest rate would help President Dilma Rousseff contain exploding personal credit and rising prices – which are currently running just below 7%. Personal lines of credit have increased by double digits on consumer spending gains. Without higher interest rates, credit and price gains would be worse off, creating more then just a headache for the President Rousseff.
2. Higher interest rates at this point are favored because the government’s other strategies haven’t worked. In order to calm market fears of skyrocketing inflation, the country’s government has implemented a wide variety of other strategies – including increasing foreign stock taxes, higher bank reserve requirements and other open market operations. But, these haven’t worked. A rate hike now would signal that the central bank is serious about rising prices of 6.5% and focused on working toward their current mandate of 4% inflation by next year.
3. Although there are downsides to an appreciating currency, the Brazilian government won’t admit that there are also the positive upsides. As long as interest rates remain favorable in the country, funds and multinational companies will continue to seek out Brazilian investments – supporting demand for reals. Benchmark rates in the country are 12% higher than they are in the United States – and comparatively higher against most other industrialized nations. The higher yield attracts global investors and funds seeking higher yields at a time when most other countries are keeping rates on hold or lowering them.
So, it’s a no-brainer. Rates will continue to go up in Brazil, helping demand for the Brazilian real to remain strong. This will help the currency to continue its hot streak against the greenback – which is at 5.7% since the beginning of the year.