[DongleDongle] Card Loan Interest Rates at 200%... Why Are Interest Rates So High in Brazil?

Early 1980s Inflation Crisis
Inflation Suppressed by Price Stability Targeting System
Loss of Economic Fundamentals Due to 2014 Economic Crisis
High Interest Rates Lead to 6.2% Personal Loan Delinquency Rate

Last year, as central banks around the world shifted to a tightening stance to withdraw liquidity from the market, there were countries that drew attention for their exceptionally high interest rates. These countries are Argentina and Brazil. Currently, the benchmark interest rates in Argentina and Brazil stand at 91% and 13.75%, respectively, which are unbelievably high levels. Considering that the benchmark interest rates in South Korea and the United States are 3.5% and 5.00~5.25%, respectively, these figures are truly elevated.

However, if we exclude the clear effects of inflation and consider the real interest rate, Argentina’s benchmark interest rate can actually be seen as lower than Brazil’s.

The real interest rate refers to the actual interest rate after subtracting the inflation rate from the nominal interest rate. You can think of it as the actual interest rate that ends up in your pocket when you deposit money in a fixed-term savings account. Argentina’s inflation rate in April was 108.8%, so subtracting this from the nominal interest rate results in a real interest rate of -17.8%. On the other hand, Brazil’s real interest rate reaches 9.57%, one of the highest levels in the world.

Why did Brazil raise its benchmark interest rate so high? Today, we will explore why Brazil’s benchmark interest rate has become so elevated and how its citizens are being affected by this.

◆The Nightmare of Inflation... Brazil’s Fight to Control Prices

Generally, interest rates are raised due to two main situations. The first is when the economy is booming. Companies tend to invest more, and households increase their spending, leading to higher demand for money. Countries with higher economic growth rates tend to have higher investment demand reflected in higher interest rates. Interest rates also rise when inflation surges. When money floods the market and prices rise, central banks raise benchmark interest rates to control the situation.

Brazil's currency, the Real

So, is Brazil’s high interest rate due to high economic growth? The answer is no. Over the past decade, Brazil’s average annual economic growth rate has been only 0.65%.

Brazil’s soaring interest rates are attributed to its economic structure characterized by high inflation volatility and a low national credit rating. Brazil experienced a hyperinflation crisis between the 1980s and 1990s. During that time, Brazil and other Latin American countries indiscriminately borrowed foreign debt in the 1970s when commodity prices were rising due to the oil shock. However, in the 1980s, commodity prices plummeted, and debt crises led to skyrocketing inflation, causing severe economic turmoil.

Perhaps to avoid repeating the economic hardships experienced then, the Brazilian government introduced an inflation targeting system in 1999. Inflation targeting means setting a target inflation rate to be achieved over a certain period and conducting monetary policy accordingly. Since then, Brazil has shown strong determination to suppress inflation by maintaining policy interest rates higher than other emerging countries. In the early 2000s, Brazil’s benchmark interest rate approached the 20% range but gradually decreased to around 10% as the economy recovered and government efforts to control inflation bore fruit.

◆Interest Rates Hovering Around 10%, Soaring to 14% Amid Economic Crisis

In the 2010s, interest rates that had hovered below 10% once again rose to the mid-teens. Following the populist policies of President Lula, inflation surged sharply, and international commodity prices fell, leading to a severe economic crisis in Brazil from 2014 to 2017. Brazil’s benchmark interest rate, which had been around 9% until 2013, jumped to 14.25% in July 2015.

Brazil’s renewed severe economic downturn since the 1990s is attributed to its economic structure focused on commodity exports. After 2014, the sharp drop in commodity prices severely impacted trade, which was centered on agricultural products, livestock, petroleum, and minerals.

Former President Josep stepping down in May 2016 due to impeachment (right). On the left is his predecessor, former President Luis Inacio Lula da Silva.

In this situation, President Dilma Rousseff, who succeeded President Lula, began to recklessly implement populist welfare policies. The Rousseff administration provided subsidies from the national budget to guarantee minimum living expenses and raised the minimum wage from about $80 per month in 2002 to $320 in 2010. As a result of the government’s indiscriminate populist policies, Brazil’s inflation rate soared to 10.71% in August 2016.

Adding to this, political turmoil intensified due to corruption scandals involving politicians around the state-owned energy company Petrobras. Due to the economic crisis from 2014 to 2017, Brazil’s national credit rating was downgraded to 'Ba2,' a speculative grade, and the depleted economic fundamentals have yet to recover.

Brazil Central Bank

Brazil’s high interest rates, which seemed like they would last forever, fell to an all-time low of around 2% in 2020 due to COVID-19. As inflation declined and the recession persisted, the Brazilian government maintained the benchmark interest rate at 2% from June 2020 to January 2021.

However, as inflation rose again and there was a need to withdraw liquidity from the market, the benchmark interest rate was raised 12 times by a total of 11.75 percentage points starting in March 2021. Currently, Brazil’s benchmark interest rate has been at 13.75% since August last year.

◆Revolving Credit Interest Rate at 447%... Households Struggling to Repay Debt

Excessively high benchmark interest rates have shaken the household economy of Brazilian citizens. As of April, the average interest rate on revolving credit card loans in Brazil increased by 84 percentage points year-on-year, reaching nearly 447%. Considering that the average revolving interest rate of seven major credit card companies in South Korea was 17.11% in the same month, this is an enormous figure. The average installment interest rate was 200%, the highest since the central bank began compiling statistics in 2011.

Brazilian citizens are known for low savings rates and high credit card usage. The number of credit cards held by Brazilians is 111 million, which is twice the economically active population.

Commercial buildings in Brazil that closed due to the impact of COVID-19.

In such an economic structure, with loan interest rates soaring sharply, individual households have struggled to repay their debts. According to Bloomberg, debt accounts for 49% of Brazilian citizens’ monthly salaries. The personal loan delinquency rate stands at 6.2%. In comparison, South Korea’s personal loan delinquency rate was only 0.32% as of February.

You might have questioned Brazil’s interest rates, which seem excessively high by Korean standards. However, understanding Brazil’s economic situation, which has long suffered from the shock of inflation, helps explain why interest rates are set so high. We conclude this article hoping that Brazil’s economy will overcome its prolonged slump and regain vitality.