Why are Brazil’s government borrowing costs so high?

Media reports point to renewed scrutiny in Brazil over whether the central bank’s widely watched economic survey is pushing up public sector borrowing costs. But the key issue is that Brazil’s real neutral interest rate (r*) is higher than in most other EMs, feeding through to higher borrowing costs. While we do think the Selic rate will be cut further over the next 12-18 months, real interest rates will remain elevated.