Brazil’s basic interest rate: How the SELIC hike affects household budgets

RIO DE JANEIRO, BRAZIL – COPOM has decided to increase the SELIC rate by 1.5 percentage points, raising it from 7.75% to 9.25% per year. The measure is intended to control inflation, which in the past 12 months has reached 10.67%, according to the Extended Consumer Price Index (IPCA) for October.

The seventh consecutive hike raises the indicator to its highest level in just over 4 years – in July 2017, the SELIC stood at 10.25%.

The result was expected by the financial market, which benefits from the increase: higher interest rates make the fixed income market more attractive, which also contributes to the appreciation of the Brazilian real (R$) against the dollar. However, this combination of inflation and high interest rates is unfavorable for households.

MONTHLY BILLS AND CREDIT

The rise in the SELIC directly affects many prices. Hikes in supermarket prices, school fees and medication can be expected in the coming days.

With this increase, families tend to use credit cards. However, the impact on the budget may be even worse. When inflation rises, the credit card revolving interest rate is directly affected. In October, it reached 343% per year, for instance.

INVESTMENTS

With rising prices, money is worth less, which affects the yields of financial investments. Until the last balance made in October, all the main types of investment funds posted gains below inflation.

Despite the change in the rule for correcting savings for inflation, the gain continues to yield just over 6% a year, below inflation if the rise in prices remains at the current level.

LABOR MARKET AND WAGES

With the increase in the price of credit and a decrease in investments, the trend is for lower sales in commerce and lower industrial output. Thus, the number of job openings decreases and unemployment rises.

The impact on salaries is also detrimental to workers. In the past 12 months, the average worker’s salary suffered an 11.1% decrease in real terms.

REAL ESTATE LOANS

In the real estate sector, the main impact will be on installment payments. As most contracts are linked to the Referential Rate (TR), the increase in the TR drives up the cost of the installments.

However, since last year, there are other forms of financing, such as inflation-adjusted interest rates, that will not be affected.

On the other hand, the rise in prices leads the construction sector to experience an increase in costs, which is passed on to the price of real estate.

IMPACT ON COMPANIES AND GOVERNMENT

The rise in SELIC makes cash flow management and credit to finance projects more expensive. In addition, it is difficult to pass on the cost to the price of the product, since consumers’ purchasing power is also reduced.

Regarding the impact of inflation on the government’s accounts, the price is paid in the long term. There is an increase in costs with retirements and pensions from the INSS (National Institute of Social Security), where the burden on the budget is greater.

The public debt is also affected, since most of the bonds issued by the government to finance itself are indexed to the SELIC rate.

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