Taming inflation, ask Brazil

Brazil was amongst the first of nations to commence raising interest rates.

They started from a base of 2% in March 2021.

At its August 3, 2022 meeting, Brazil’s Central bank increased interest rates a further 50 basis points bringing its rate to 13.75%.

This was the 12th consecutive raise making for a cumulative 1,175 basis point increase.

This represents a quantum of nearly 7 fold increase.

Brazil’s inflation rate in July 2022 fell to 10.1%, down from June’s 11.9% reading.

Incidentally, Brazil’s inflation target rate is 3.5%.

In contrast, the U.S. Fed Funds Rate has risen from 0.25% to its current 2.5% representing a 10 fold increase. The current inflation rate in the United States is 8.5%.

Is the quantum of the rate increase more relevant rather than the absolute percentage rate?

If so, will one more rate hike in the U.S. be enough?

Brazil, Chile, Mexico and other commodity sensitive and exporting countries all started raising interest rates, aggressively and a year before G8 nations.

Why?

As paraphrased in the following posts written over the past year, “inflation is a tax that the poor can’t afford to pay”.

Although, more precisely, the citizens of those nations carry an average household debt as a percentage of GDP nearing 26%.

While the “% of household debt to GDP” for the citizens in the United States, Canada, United Kingdom and Australia range from 80% to 125%, with Australian’s being the highest.

For the rising cost of tomatoes, fuel or lettuce…..hiking rates too aggressively would ‘crucify’ the indebted households in the developed world and more importantly (for some, many or government) it would stifle their largest asset class………residential real estate.

August 27, 2022

by Rob Zdravevski

rob@karriasset.com.au

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