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Posts Tagged ‘Brazil’

Brazil’s unexpected rate cut

The Brazilian economy is an emerging superpower (see A tale of two cities), but even its growth slowed in the second quarter of the year, although the economy still appears to be growing above capacity. In reaction to that latest economic data, the central bank slashed interest rates by 50 basis points to 12%. The Central Bank said:

‘Reviewing the international scenario, the monetary policy committee considers that there has been a substantial deterioration, backed up, for example, by large and widespread reductions to the growth forecasts of the main economic regions.’

Rates had previously been hiked up 5 times in the year to tackle rising inflation, which has been some way above its inflation target. Such tightening policies have become commonplace in many emerging economies to prevent overheating. However, following this reversal of policy, questions have been raised about the independence of the central bank, as some politicians have recently been calling for a cut in rates, including President Rousseff himself. As Tony Volpon at Nomura Securities said:

‘They gave in to political pressure. The costs will likely be much higher inflation and a deterioration of central bank credibility…It has damaged the inflation-targeting regime.’

Many believe the rate cut is premature and the last thing the economy needs given the inflationary pressures it’s been facing. Huge spending cuts have been announced to bring inflation back under control, together with the previous rate rises, so this cut in interest rates to stimulate growth is likely to put more pressure on costs and prices. Only time will tell exactly how effective or problematic this new direction of monetary policy will be.

Brazil’s growth slows despite resilient consumers Reuters, Brian Ellsworth and Brad Haynes (2/9/11)
Brail in surprise interest rate cut to 12% BBC News (1/9/11)
Rousseffl’s ‘Risky’ rate cut means boosting Brazil GDP outweighs inflation Bloomberg, Arnaldo Galvao and Alexander Ragir (2/9/11)
Brazil makes unexpected interest rate cut Financial Times, Samantha Pearson (1/9/11)
Brazil rate cut stirs inflation, political concerns Reuters (1/9/11)

Questions

  1. What is the relationship between the macroeconomic objectives of inflation and economic growth?
  2. Why are there concerns that the recent reduction in the interest rate may worsen inflation? Do you think that a decision has been made to sacrifice Brazil’s inflation-targeting regime to protect its economic growth?
  3. Why are there questions over the independence of the central bank and how will this affect its credibility? What are the arguments for central bank independence?
  4. Growth in Brazil, although lower this year, still remains very strong. Why has the Brazilian economy been able to continue its strong growth, despite worsening economic conditions worldwide?
  5. What type of inflation are emerging economies experiencing? Explain how continuous hikes in interest rates have aimed to bring it back under control.
  6. What is meant by overheating? How will the central bank’s past and current policies contribute towards it?
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The War of the Currencies

One of the key problems faced by all countries over the past three years has been a lack of consumer demand. Firms face demand from a number of sources and when the domestic economy is struggling and domestic demand is weak, a key source of demand will be from abroad. By this, we are of course referring to exports. However, it was not just one country that plunged into recession: the global economy was affected. So, when one country was suffering from a weak domestic market, it turned to its export market and hence to other countries for demand. However, with these economies also suffering from recession, the export market was unable to offer any significant help. In order to boost exports, governments have tried to make their export markets more competitive and one method is to cut the value of the currency. Japan, South Korea, Thailand, Columbia and Taiwan are just some of the countries using this strategy.

Following these interventions, the Brazilian finance minister has commented that a new trade war has begun. Speaking to a group of industrial leaders in Sao Paulo, Mr. Mantega said:

‘We’re in the midst of an international currency war. This threatens us because it takes away our competitiveness.’

As more and more governments intervene in the currency market in a bid to boost exports, those refraining from intervening will suffer. Furthermore, interest rates throughout the developed world have remained low, as central banks continue their attempts to boost economics. However, this has led vast amounts of money to be transferred into countries, such as Brazil, where there is a better supply of high-yield assets. This has worsened the state of affairs in Brazil, as the Brazilian currency is now thought to be the most heavily over-valued currency in the world. This adversely affects Brazil’s export market and its trade balance. The following articles look at the lastest developments in this new ‘war’.

Articles
Currencty ‘war’ warning from Brazil’s finance minister BBC News (28/9/10)
Brazil warns of world currency war Telegraph (28/9/10)
Brazil warns of world currency ‘war’ Associated Press (28/9/10)
Brazil defends exporters in global currency battle Reuters (15/9/10)
Kan defends Japan’s intervention in the currency markets Associated Press (25/9/10)
US and China are still playing currency Kabuki Business Insider, Dian L. Chu (21/9/10)
How to stop a currency war The Economist (14/10/10)
What’s the currency war about? BBC News, Laurence Knight (23/10/10)

Exchange rate data
Exchange rate X-rates.com
Statistical Interactive Database – interest and exchange rates data Bank of England
Currencies BBC News
Currency converter Yahoo Finance

Questions

  1. Demand for a firm’s products comes from many sources. What are they? Illustrate this on a diagram.
  2. Why is a weak currency good for the export market?
  3. How will a country’s trade balance be affected by the value of its currency?
  4. Explain the process by which investors putting money into high-yield assets in countries like Brazil leads to currency appreciation.
  5. What are the options open to a government if it wants to devalue its currency? What are the advantages and disadvantages of each method?
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A tale of two cities

Throughout 2009/10, a new millionaire was created in Brazil every 10 minutes – not bad for a developing country! Despite the global recession, Brazil has managed growth of almost 5% and is set to overtake both the UK and France to become the world’s 5th largest economy. Brazil will hold the next World Cup and the Olympic games after London, bringing it further recognition as a global power. It has the third largest aircraft manufacturing industry in the world and is even doing its bit to tackle climate change, with 50% of its cars running on bio-fuels. It exports more meat than any other country and is looking to become an energy power. With falling unemployment, a buoyant economy, growing confidence, fantastic beaches and 6 millionaires created every hour, Brazil looks like the perfect place to live.

However, that is just one side of the story. Brazil is still a country with deep poverty – approximately 60 million people. The slums, or favelas, are home to 1 million people in Rio alone, where unemployment is high and drug wars common. There has been a concerted effort to reduce the drug trafficking business, but this has only created more unemployment. There is little sanitation, poor electricity and minimal chance of escape. Neighbourhoods need rebuilding, and despite high growth and arguably the most popular president in the world (Lula da Silva), there are calls for political, social, taxation and labour market reforms. This cycle of poverty and the equality gap needs addressing before the Brazilian economy can really be considered a global power.

Webcasts and podcasts
Will Brazil’s economy keep growing? BBC News, Matt Frei (27/5/10)
Brazil’s bid to be ‘world’s breadbasket’ BBC World News America, Paulo Cabral (26/5/10)
Tackling Brazil’s poverty BBC World News America, Gary Duffy (28/5/10)
Brazil’s development spurs economic quality hopes BBC World News America, Matt Frei (27/5/10)
Brazil’s air industry takes off BBC World News America, Paolo Cabral (24/5/10)
‘Our growth quality is better than China’ BBC World News America, Marcelo Neri (25/5/10)
Brazilian economy poised to overtake UK’s BBC News Today, Matt Frei (27/5/10)

Data
Economic data Banco Central do Brasil
Brazil Economy EconomyWatch
Brazil CIA World Factbook
Brazil Geognos
Brazil data World Bank

Questions

  1. What are the main causes of (a) inequality and (b) poverty in an economy? What is the difference between these concepts?
  2. How does the government subsidised housing programme aim to help low income households. Use a diagram to illustrate the effect.
  3. What policies can be used to reduce the equality gap?
  4. Are those living in the favelas in absolute poverty? How do we distinguish between absolute and relative poverty? Is it the same across the world?
  5. What are the adverse effects of fast growth in Brazil?
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