Brazil: Macroeconomic Profile

Article Index

Prices, Interest and Exchange Rates

Prices

Two years ago Brazil was a country which suffered one of the highest rates of inflation in the world. In 1994, the inflation recorded by the IGP-DI (the General Price Index - Domestic Reserves) rocketed to 1,094% but, following the introduction of the stabilization program, plummeted to 14.77% in the following year.

A new currency came into being in July, 1994, the Real, which gave continuity to the program of economic stabilization launched a few months earlier. The outcome was a dramatic decline in the inflation rate of more than 30 per cent a month, settling to an average of 1.2% per month. This pattern has since been maintained, thereby confirming the success of the policy to control inflation. The Brazilian Government has concentrated its efforts on the fostering of the necessary fiscal austerity to guarantee the success of the new monetary regime.

Interest rates

When compared to standards elsewhere in the world, Brazil's financial market is found to be highly developed. Interest rates throughout the various sectors of the financial market are determined by the forces market.

The Brazilian government, offering bonds on the open market, determines from their earnings the scenario for interest rates. As the cardinal agent in the financial system, the government has played a decisive role in setting of interest rates in this country.

Three principal forces are currently orienting government attitudes on how the policy on interest rates will be conducted: the handling of domestic debt, the control of inflation and the volatility of interest rates.

The government has favored a policy inclined toward high interest rates as a means of holding back inflation and a significant consequence of this has been the entry of foreign capital. This approach leaves no doubt about the intention to use interest rates as a mechanism to gain control over aggregate demand and, consequently, over inflation.

The government's economic think-tanks have diagnosed a reduction in the basic rates of interest for 1996. Nevertheless, fidelity to the policy of high interest rates is a key to sustaining the plan to stabilize the economy. A natural consequence is that, in the face of inflationary pressures, the Government will not hesitate to use mechanisms to restrict demand.