Brazil’s third-quarter gross domestic product (GDP) growth rate of 6.8% overstates its prospects in a credit crunch and commodity price decline. However, its high interest rates have prevented a bubble without killing growth—and there’s now room for easing to fight recession. Next time round, others should follow this policy road.

Brazil’s GDP grew at a 6.8% annual rate in the third quarter of 2008. Finance minister Guido Mantega expects growth of 3 to 3.5% in the fourth quarter and 4% in 2009. The Economist panel expects Brazil to have GDP growth of 2.4% in 2009, and to have a current account deficit of 1.8% of GDP and a budget deficit of 1.5% of GDP in 2008.

The Central Bank of Brazil’s Selic short- term rate is 13.75%, while inflation is currently running at 6.3%. The real has lost 29% of its value since July, while the stock market is down 48% from its May peak.

In 2002, Brazil skated close to bankruptcy because of its huge foreign debt and the default of neighbouring Argentina. But the new socialist president Luis Inacio “Lula" da Silva, expected to be hard-Left, instead maintained tight budgetary control, while allowing the central bank to keep interest rates relatively high. The result was economic growth and a rapid reduction of Brazil’s foreign debt-to-GDP ratio, making it a fashionable growth story.

Previous Brazilian governments, faced with a strong currency, rising commodity prices and massive foreign investment, had relaxed monetary and fiscal policies, producing asset bubbles and balance of payments crises. This time the central bank avoided that mistake, maintaining interest rates at high real levels—currently more than 7 percentage points above the 6% inflation rate. Growth has accelerated, but the eventual bubble appears to have been confined to the areas favoured by foreign portfolio investment, especially the stock market.

With international monetary conditions tightening, the outflow of foreign money has contributed to a 48% decline in Brazilian stocks since May. The real has also fallen by 29% as commodity prices have dropped. However, Brazil has a substantial industrial base that has helped sustain growth.

Going forward, economic trouble elsewhere will inevitably slow Brazil’s growth. However, the central bank’s discipline has left it with the capacity to lower interest rates somewhat to stimulate the domestic economy. The government has recognized this, and has introduced only modest reflationary measures with no massive stimulus package.

Brazil is the only big economy that kept real interest rates high during the global credit boom, and a degree of economic resilience appears to be its reward. For other countries, it’s too late (and too early) to raise rates. But next time, maybe the US and others will find something to learn from Brazil’s lonely monetary course.