Annual Interest Rate

Crazy times in Brazil, as the fixed annual interest rate climbs from 14.25% to 14.75% a week ago. In the United Kingdom it was the opposite, as the base rate reduced from 4.5% to 4.25%.

According to CNBC, the central bank (Bank of England) reduced its key interest rate from 4.5% to 4.25% on Thursday amid a backdrop of lackluster economic growth and uncertainty around President Donald Trump's trade tariffs. The move is likely to bring relief to borrowers, businesses and hard-pressed consumers across the country.

The primary entity responsible for setting the Bank Rate (or base rate) in England is the Bank of England's Monetary Policy Committee (MPC). The MPC, comprised of nine members, makes decisions on the rate about every six weeks. While the Bank of England is the primary body, the MPC's decisions are subject to the overall policy objectives set by the government, including the inflation target. 

Now I’ve been saying for a long time that the Selic which is the index used in Brazil to calculate the base rate is flawed, or used as an excuse by Brazil’s central bank to support banks by making sure they profit from ordinary Brazilians i.e., the middle to lower class who often need borrow money to survive.

COPOM in the Brazilian Central Bank stands for the Monetary Policy Committee. This committee is responsible for setting the target for the Selic rate, which is the key interest rate in Brazil, and is crucial in shaping monetary policy to achieve price stability and sustainable economic growth. The committee also plays a role in setting the inflation targets set by the National Monetary Council (CMN). 

What they forget to mention is borrowing money is almost impossible because at such a high-rate, businesses are not able to meet repayments. In fact, when a firm cannot meet its outgoing bank rate (the cost of borrowing money), it is experiencing a liquidity crunch or liquidity risk. This occurs when a company lacks sufficient funds to meet its short-term obligations. In other words, they are unable to pay their debts as they come due. 

Liquidity Crunch/Risk:

This refers to the situation where a company has insufficient cash on hand to meet its immediate financial obligations, including paying interest on loans, rent, wages, or other short-term liabilities.

Outgoing Bank Rate:

This refers to the interest rate a company pays on the money it borrows from a bank.

Impact:

A liquidity crunch can lead to several problems, including:

• Difficulty in meeting payment obligations.

• Delayed settlements.

• Potential for default on loans.

• Damage to the company's reputation and creditworthiness. 

  
  

When a company falls two or three months behind on financial obligations, it typically faces escalating problems including difficulty paying creditors, potential legal action, and a risk of insolvency. These issues can lead to a decline in creditworthiness, difficulty obtaining future financing, and eventually, liquidation or business rescue proceedings. 

Having such a high percentage base rate, as seen in Brazil is a risky business. On one hand the central bank is setting a high central bank base rate (or policy interest rate) aiming to curb inflation and cool down an overheated economy. By raising the cost of borrowing, it discourages spending and investment, thus reducing demand and preventing price increases. 

Central banks that use such tactics to curb inflation when the problem relates to government spending shows laughable incompetence, and I would go as far as to say ‘moronic attributions to society’ because they are unable to see the bigger picture and only the citizens suffer the brunt of the turmoil. Curbing a healthy economy only slows down prosperity, companies are forced out of business, and generally sales go downhill. This holds down GDP growth!

Yes, a high central bank base rate (or policy rate) generally tends to reduce GDP growth. When a central bank raises interest rates, it increases the cost of borrowing for businesses and consumers, which can lead to slower spending and investment, ultimately dampening economic activity and growth. 

By slowing down the rate of borrowing, it also increases delinquency for those who have borrowed money and are unable to pay it back which is considered a crime and can mean legal action being taken against the borrower. Being in arrears then can be very harmful, as once on the road to bankruptcy it is usually a very difficult maneuver to turn things around and become fully paid up.

The banking world in Brazil is complex, but then banks have been making a ton of money and Brazilians don’t seem to be able to stand up against them, or rather nowadays online banks are providing competition.

Yes, some evidence suggests that banks in Brazil may engage in practices that could be considered exploitative, particularly regarding financial services for lower-income customers. These practices include charging high interest rates and fees, making it difficult for consumers to resolve complaints, and potentially hindering the development of fintech innovation. 

Here's a more detailed look at the issues:

1. High Fees and Interest Rates:

• Some universal banks in Brazil have expanded their reach to lower-income customers, but this expansion has been accompanied by practices that could be characterized as financial exploitation.

• This includes charging high interest rates and fees, which can put a strain on these customers and make it difficult for them to manage their finances. 

  
  

2. Difficulty Resolving Complaints:

• Studies have found that a significant portion of consumer complaints against banks in Brazil are left unresolved, highlighting issues with customer service and dispute resolution.

• Banks like Caixa, Bradesco, and Santander have shown less capacity to improve their handling of complaints. 

  
  

3. Hindering Fintech Innovation:

• Some evidence suggests that large banks may be hindering the growth of fintech companies, potentially harming consumers who could benefit from innovative financial services.

• For example, one study found that Bradesco was accused of hindering the development of a fintech company called Guiabolso. 

  
  

4. Cybercrime and Fraud:

• Brazil is a significant target for cybercrime, including online banking fraud and financial malware. 

• This can lead to financial losses for customers, as seen in the $1.5 billion in fraud-related losses in the banking sector in 2023. 

  
  

5. Regulation and Consumer Protection:

• While Brazil has a regulatory framework in place to ensure financial stability and consumer protection, there are ongoing challenges in enforcing these regulations and addressing exploitative practices.

• The National Financial System (SFN) operates under the regulation set by the National Monetary Council (CMN), the Banco Central do Brasil (BCB), and the Securities Commission (CVM). 

  
  

6. Open Banking:

• The introduction of open banking rules in Brazil aims to promote competition and empower customers by allowing them to share their data with other financial institutions.

• This could potentially help address some of the concerns about exploitation by providing customers with more choice and control over their finances. 

  
  

Since my arrival in Brazil in the late 80s little has changed to protect consumers. Banks argue that they cannot reduce interest rates which are very high because many customers get into arrears on their repayments. Well, it isn’t surprising when interest rates keep going up, is it?

Take care!

Prof. Carl Boniface

Vocabulary builder:

Lackluster (adj) = dreary, uninspiring, dull, jaded, tame, monotonous, boring, bland, lifeless, unexciting, uninteresting

Flawed (adj) = faulty, defective, damaged, blemished, imperfect, inconsistent, unsound, weak, (ant) flawless, perfect

Insolvency (n) failure, ruin, collapse, indebtedness, liquidation, bankruptcy  

Delinquency (n) = in arrears, failing in or neglectful of a duty or obligation; guilty of a misdeed or offense. (of an account, tax, debt, etc.) past due; overdue. of or relating to delinquents or delinquency: delinquent attitudes.

Paid up (phrasal verb) having given all of the money that one owes on a debt until a specific date. You're (all) paid up through June.