Apr 1, 2002

Irrational Policies, High Interest Rates

Interest rates in many Latin American countries are very high, both in nominal and real terms. Rates in Argentina, of course, as it struggles to defend its currency and reconstitute monetary policy, are all over the place. Collapse in confidence in the peso is so complete that interest rates at any level are unlikely to revive the currency for long. Brazil's semi-independent Central Bank has begun easing rates after moving them up over a year ago to 19%. With inflation forecast at about 4% this year, base interest rates are 14% in real terms, a rate so high that few legitimate businesses can raise long term financing. The central bank argues that rational fiscal policies and tight monetary policy will eventually deliver exchange rate and consumer price stability needed to fuel sustainable growth. That has happened in Latin America's two economic star performers, Mexico...

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