Saturday, August 23, 2008

Maybe Bernanke Should Learn Portuguese

Brazil's central bank has raised its policy rate to 13%. Our Fed has the federal funds rate at 2% or two hundred and sixty basis points below inflation. So who is following a Third World monetary policy? The home of Embraer or Boeing?

Henrique Meirelles is the head of the Banco Central do Brasil and he understands his job description.

Antonio Regalado and Joanna Slater relate in today's Wall Street Journal, "During one of Brazil's many past bouts of high inflation, Henrique Meirelles recalls, he and his maid had a deal. On payday, she didn't have to work. That way, she could rush to the store and spend her entire month's salary before it became worthless.

"Mr. Meirelles is now head of Brazil's central bank, and the country's inflationary past is a big reason why he now ranks as one of the world's toughest inflation fighters. Even as the global economy slows, the Banco Central do Brasil has acted more aggressively than many of the world's central banks against inflation, raising short-term interest rates to 13%. The bank is expected to raise rates again in September."

The whole article is quite interesting. My favorite quote comes when Senhor Meirelles explains there is little "room for leniency. When there is disequilibrium between supply and demand, he says, it will be corrected in one of two ways: higher prices or higher rates.

"'The big advantage of using the interest rate is that you have someone in the driver's seat. When inflation is taking care of it,' he says, 'no one is driving.'"

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