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Economy & Business - January 2011 (ISSN 1741-7430)

Raising rates

On 19 January Brazil's central bank did what economists and the financial markets wanted, and raised the base interest rate (known as the Selic) by half a percentage point to 11.25% a year. Businessmen were unhappy. Their complaints are based on three arguments. The first is that Brazil already has the highest real (inflation-adjusted) interest rates in the world, so raising rates further is going to have little effect. The second argument is that all higher rates will do is push the Real to even more overvalued heights against the dollar and thus start to price Brazilian manufactured goods out of not only export markets but also their own domestic market. Their third argument is that the increase was not needed because inflationary expectations are subsiding in Brazil.

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