New Tools for Old Problems

Jul 1, 2011

Faced with an over-valued real the Brazilian government is relying on a wider set of ‘macro-prudential’ measures to fight inflation.

by Vincent Bevins

Brazilian authorities have been resorting to less conventional methods to tackle rising prices as a way to avoid strengthening the real through rate hikes. This is uncharted territory and arguably a risky venture for a country that has a history of hyperinflation. Markets are not necessarily convinced the plan will succeed, but understand the need for a broader set of monetary tools.

Brazil has long been attacking its serious inflation problem with serious interest rates. The hyperinflation that plagued the country in the 80s and 90s was brought down with a new currency, the real, as well as sky-high rates. Fifteen years after the “plano real” was put into effect, the nation still has some of the highest real interest rates in the world, posing problems for local long-term investment, though inflation has been under control for some time.

But as last year’s rapid economic...

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