The Specter of Brazilian Inflation

Canada’s Globe and Mail today reported on the specter of Brazilian of Brazilian inflation. Prices have surged over the last years; inflation was 10 percent last year and the Real is stronger than ever. So strong, reports the Globe, that Goldman Sachs dubbed it the most overvalued currency in the world. Good time for Brazilians to travel, bad time for exporters. Globo reported yesterday that for the first time Brazilian importers are now exceeding exporters because of the price of the Real, and current accounts are trending negative.

The problem, observes the Globe and Mail, is that raising interest rates to fight inflation has serious costs in a country that has among the world’s highest prime interest rates (10.5 percent). Loans are extremely costly in Brazil, and access to capital by the poor is particularly difficult. It would seem that these conditions would make Brazil a prime location for micro-lending (adjusting, of course, for inflation).

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