beyondbrics

It’s easy to get blasé about Brazil: the economy is thumping along; markets are relaxed about the forthcoming election; and nobody seems that excited – or even perturbed – by a further rise in interest rates on Wednesday.

So to wipe away any encroaching holiday stupor, consider this. Brazil probably has the highest real interest rates in the world, by a very fat margin. And, by this evening after the central bank raises nominal rates by an expected 75 basis points to 11 per cent, they will be even higher still.

This matters, because real men (and women) like to deal with real numbers. So real interest rates, as the term suggests, are the rates that really matter. They are calculated by subtracting inflation from nominal central bank rates.

In the developed world, the historic real rate is about 3 per cent. But today, Japan excepted, real rates are all negative. They are about -1.5 per cent in the eurozone, and a chunky deflation-beating -2 per cent in the US and the UK.

The emerging world should have a higher real cost of capital – because of risk, and perhaps lack of savings. Yet today, real rates are mostly negative in the emerging world as well. Take the Brics, that purposeful-sounding acronym that now bestrides the globe. Even in Russia real rates are about -0.15 per cent, and in India about -3.4 per cent.

China manages a 2 per cent real rate. But Brazil stomps home with a massive 5 per cent real rate. Eyeball the biggest economies in the world, and none comes close: Australia is a distant second to Brazil with a 2.5 per cent real rate.

What does this tell us? For one, it emphasises quite how robust Brazilian policy makers feel their country’s economic growth is. But, secondly, high rates are a reminder of the legacy of Brazil’s unstable, high-inflation past; an era now supposedly over.

O melhor país do mundo! the best country in the world, as Brazilians sometimes chauvinistically exclaim. Perhaps for some – but it wasn’t always so.

Related reading:
Who will lead Brazil? – FT.com
Why Brazil must try harder – Martin Wolf