Why interest rates are high in Brazil?

It is really amazing to note how high interest rates are in Brazil. Its policy rate usually hovers in double digits when we in India fret over policy rates around 8-8.5%.

This paper from Alex Segura-Ubiergo looks at this issue of high interest rates in Brazil. he looks at following reasons:

(A) Fiscal considerations;
(B) Low domestic savings;
(C) Institutional weaknesses;
(D) Previous history of high inflation and inflation volatility; and
(E) Factors affecting the monetary policy transmission mechanism.

Out of the five, the main reason is that Brazil has low savings rates which leads to higher interest rates. Other economies like Korea etc have savings rates around 30% of GDP where Brazil savings averages around 15-18% of GDP. Lower savings rate means less funds available for investment leading to higher rates. There is some evidence of inflation inertia still present in Brazil economy..

However even accounting for  low savings, interest rates are still higher in Brazil. The author is unable to pinpoint the reason. He says perhaps this is because of public lending at subsidized rates.

controlling for everything else in the model, Brazil’s real interest rates are still about 2 percentage points higher than those of its inflation targeting peers (this is captured by the fixed effects in the regression model). This suggests that there are other country-specific factors that could be associated with higher real interest rates in Brazil beyond those presented in the model. A potentially important factor in this regard, which could not be tested empirically for lack of comparative data, and would require particular attention in future research would be the effect of public lending at subsidized rates.

While this type of lending was one of the most effective countercyclical tools the Brazilian authorities used during the post-Lehman crisis, its use in normal times should be mindful of the fact that it may also be reducing the transmission mechanism of monetary policy and contributing to a higher market-determined equilibrium interest rate

Interesting paper. Points to some references as well on this Brazil puzzle…