The reason both the United States and Brazil, two economic powerhouses, have set their interest rates so low, is to encourage borrowing and spending by consumers and help boost the economy. Low Interest rates "help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses." The Federal Reserve in the Untied states is required by law to set monetary policy to achieve maximum employment, stable prices and moderate long-term interest rates. Copom in Brazil is set to similar standards and many people in both nations trust these institutions.
Such low interest rates are fond amongst domestic consumers but do not sit well with foreign investors. If people can borrow more, they will buy more and help stimulate the economy. With lower interest rates often comes the devaluation or weakening of the dollar or currency. With your domestic dollar weakening, imported or foreign goods will be more expensive, thus making more sense to buy domestically produced goods, helping to stimulate the economy overall. When interest rates are set low, inflation is something to worry about. When demand exceeds the supply of a good, prices go up and slow the economy down. Raising the interest rate can help fight high inflation and attack foreign investors. Higher interest rates typically bring a stronger dollar into play which ultimately leads to more demand for a stronger dollar. Foreign investors are looking for the highest rate of return on their investments, and with a high interest rate and strong currency, that is their best bet.
Time and inflation rates will tell how long Brazil and the United States can keep their interest rate low. For now, strengthening the domestic economy in terms of consumer spending is all that matters for each.
Low interest rates can be both good and bad. As we discussed in class low interest rates are good because when it comes to borrowing money you do not want to have to end up paying so much more than you initially borrowed, but bad when you are trying to make money on what you already have. The worst case scenario is actually putting money into savings, but the dollar inflating so that you actually lose money. Unfortunately interest rates are not always in our favor.
ReplyDeleteThe best bet for Brazil at this point may be to raise interest rates, but only slightly. It will be able to achieve a few objectives by doing so: they can maintain a solid level of domestic borrowing, as well as increase American investment. They can also keep inflation at a manageable level.
ReplyDeleteBrazil's economy grew only .9% in 2012, which according to BBC News, is the lowest in 3 years. Lowering the interest rate may therefore seem the best viable option for President Dilma Rousseff. Additionally, the government is pursuing extending the Bola Famila program, which will put 2.5 million more people on welfare. Rousseff claims that this is due to increasingly problematic inequality that is so prevalent in Brazil, but it may help in increasing consumer spending to further stimulate the economy. The outcomes of these efforts will reveal themselves with time.
ReplyDeletehttp://www.bbc.co.uk/news/business-21630930
Low interest rates are an interesting tool of central banks, I definitely hope that they can be kept low enough for long enough to help with the global economy. I just read an article about a phenomenon called an inverted Treasury yield curve which is a type of short-term term vs long term interest rate manipulation by the Fed. This action by the Fed preceded the Great Depression and stock crash of the 30s as well as all seven recessions since 1964. I just spent an hour writing a detailed post to your blog, citing this article, and it disappeared when I hit the "preview" button at the bottom. So this will be a bit more abridged.. Anyway, it tells how Bernanke knew about the strong correlation between creating an inverted yield curve and recessions yet used it anyway to "fight inflation" by slowing the economy. I think its interesting how all blame always goes to the bankers, who doubtless had their own role to play in the economy's terrible state, when the Fed according to this article also had a very large if not larger role to play. I didn't have time to search for any articles that specifically discuss an opposing viewpoint on the subject of inverted yield curves and Bernanke's role in the economic crisis of the last few years so if anyone finds one I'd love to read it!
ReplyDeleteHere's the link to that article:
http://www.forbes.com/sites/richardsalsman/2011/07/17/how-bernankes-fed-triggered-the-great-recession/2/
I also agree that Brasil should keep interest rate low, Brasil as of today needs to focus on its domestic investments (by Brasilians or foreigners) in order to try to decrease this so large welfare program created by the leftists government, which keeps the poor people from working due to the high benefit of the welfare program in comparison to the minimum wage. Also, by lowering the interest rate in Brasil, that will create an incentive for people to get their money out of their so highly beneficial savings account and look for some investments that can contribute to both the investors and the country's economy. The reason to why I believe that the government, although leftist, is allowing for the interest rate to decrease is because of the 2014 world cup and the 2016 olympics, in which Brasil as of today is way behind schedule, therefore, the government must provide incentives to investors.
ReplyDeleteNice post.
ReplyDeleteSounds reasonable... if Brazil is seeking economic growth keeping their rates should encourage business to borrow and help keep exports on track. However, 7.25% does not seem "low" when the US is at zero. In fact, the Real has been appreciating steadily against the dollar.
Check out this chart:
https://www.google.com/finance?q=CURRENCY:BRL
Looks like at the moment, the market is anticipating higher rates / real returns in Brasil relative to the US.
With only 0.9% economic growth in 2012 which is far from the 10% economic growth of 2010, it will be interesting to see how Rousseff, President of Brazil, will react to economic concerns. According to the Electoral Model mentioned in class, if she wants to get reelected next year, we can expect a raise in Brazilian interest rates if there is not a visible increase in economic growth in the coming months. This article describes what economists expect to occur in the Brazilian economy and what this will mean for policymakers in Brazil.
ReplyDeletehttp://www.buenosairesherald.com/article/125793/brazil-poised-to-keep-interest-rates-steady
Like many others, I too believe that both the U.S. and Brazil should keep their interest rates low. Yes, at a certain point demand could exceed supply and begin to drive prices higher, but both Brazil and the U.S. have struggling domestic economies that need to be fostered first. Also, the amount of inequality in both the U.S. and especially Brazil can be decreased by low interest rates. Secondly, Brazial has done a stand-up job by not caving under pressure to conform to U.S. monetary policies, yet has picked and chosen places where it suites Brazil's unique economy to parallel the U.S. In this case, interest rates. I believe by selectively following the lead of the U.S., Brazil maintains enough autonomy to act on their unique economy, yet gains from having a successful role-model in trade to mirror.
ReplyDelete