Brazil Central Bank Maintains SELIC Rate at 2% per Year, Lowest in History

RIO DE JANEIRO, BRAZIL – The announcement, made on Wednesday, January 20th, is in line with the financial market’s expectations, despite inflationary pressures. It is the third consecutive time that the collegiate body has decided to maintain the level at an all-time low.

The announcement’s new aspect consisted in the withdrawal of forward guidance, a tool used by COPOM since August to signal how long the interest rate will remain at its current level. The Central Bank should monitor price behavior, the speed of vaccination of the population – considered a tool to expedite economic rebound – and the country’s fiscal risk.

It is worthy of note that the removal of forward guidance does not mean that the basic rate will automatically rise. “The economic scenario continues to dictate, at this moment, a remarkably high incentive in face of the uncertainties regarding the evolution of activity”, says COPOM in its statement.

In the last meeting, held in December, the Committee had signalled the trend toward maintaining the interest rate in its forward guidance. The collegiate saw the inflationary pressure, which materialized with the IPCA closing 2020 at 4.52%, but saw the pressure as temporary due to the emergency aid.

In the decision released on Wednesday, the entity emphasizes that the increase in the price of international commodities and their impact on food and fuel prices lead to higher projections for inflation in coming months. As a result, the price pressure that occurred in 2020 may continue this year, regardless of the different reasons.

“According to the forward guidance adopted at its 232nd meeting, COPOM would not reduce the degree of monetary stimulus as long as certain conditions were met. In light of the new information, COPOM considers that these conditions have no longer been met since inflation projections for its baseline scenario are close enough to the inflation target for the relevant monetary policy horizon. As a consequence, forward guidance ceases to exist and the conduct of monetary policy will henceforth be based on the customary analysis of the risk balance for prospective inflation.”

For this year, the financial market estimates that inflation will close the year at 3.43%, below the 3.75% target set for 2021.

The SELIC decrease has been steadily occurring since 2016, when it stood at 14.25% per annum. But the maintenance of interest rates at their lowest level in history may not be sustainable in the long term, due to its side effect. “The financial market expects the SELIC to be high and close the year at 3.25%. This rise should begin in the second quarter, considering economic activity levels in the country. According to Bacen’s last minutes, COPOM should again alert to the importance of the reform agenda and the concern with Brazil’s fiscal question,” highlighted Gustavo Bertotti, chief economist of Messem Investments.

Economists and COPOM itself, draw attention to the country’s fiscal risk. The increase in public indebtedness was a problem prior to Covid-19, but it has been exacerbated by the stimulus. With the pandemic, this picture is deteriorating. With lower tax revenues due to the slowdown in economic activities, the country’s fiscal deficit has become an even greater warning sign.