Expected interest rate hikes could push Brazilian rates over 11 percent

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TEXT OF STORY

STEVE CHIOTAKIS: The Federal Reserve has kept interest rates at just above zero for more than two years now. But in Brazil, another expected interest rate hike today could push rates above its current 11 percent. Inflation in Brazil is at a six year high and the central bank there is desperate to get it under control.

The BBC's Paulo Cabral joins us now from Sao Paulo. Good morning.

PAULO CABRAL: Hello Steve.

CHIOTAKIS: Why is inflation so high in Brazil and what risks are there if they keep raising the interest rate?

CABRAL: In all, what we have not in Brazil is what economists call demand inflation. That means people willing to buy too much. That's not surprising. Brazil is in a very good economic moment so people have more money. Supply and demand makes prices then rise. And then how that relates to interest gates. Government has to keep the interest rates high to hold the inflation, but keeping the interest rates high -- it's also harder to increase the productivity in the country and that causes inflation.

CHIOTAKIS: Now Paulo, inflation in the U.S. is about 1 percent -- but what's it like living in a country where prices are rising more rapidly?

CABRAL: Well, look -- you know, it's about 5 percent in Brazil right now and that's not even what would be considered really high in Brazil. Remember 20 years ago, inflation would reach the heights of 90 percent in one month. That means like having a check in your hand, if you take one week to cash it, it already lost one fourth of its value. So you do notice that your salary buys less and less over time, but I think the real fear in Brazil is to go back to that situation of hyper inflation that the country has experienced in the past.

CHIOTAKIS: The BBC's Paulo Cabral joining us this morning from Sao Paulo, thank you so much.

CABRAL: Thank you Steve.

About the author

Steve Chiotakis was the host of Marketplace Morning Report until January 2012.

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