Brazil’s Central Bank Interrupts Sequence, Holds SELIC at Two Percent per Year

RIO DE JANEIRO, BRAZIL – After a long downward trajectory, the Central Bank (BC) decided to maintain the economy’s basic interest rate at its current two percent a year level. The Monetary Policy Committee (COPOM) decision was unanimous in a meeting that ended on Wednesday, September 16th. The index was expected to be maintained by financial analysts, who bet on the SELIC at this rate until the end of the year.

In a note, COPOM reported that inflation should rise in the short term, mainly because of the temporary upward trend in food prices and the partial standardization of the price of some services, in the context of greater resumption of economic activity. “The Committee understands that this decision [maintenance of the SELIC rate] reflects its basic scenario and a balance of risks of greater than usual variance for prospective inflation and is compatible with the convergence of inflation to the target in the relevant horizon, which includes the 2021 calendar year and, to a lesser degree, that of 2022,” reads an excerpt from the official statement.

On future adjustments in basic interest rates, the Committee emphasized that new changes, should they occur, will be gradual and will be dependent on the situation of public accounts. “Copom understands that the economic conjuncture continues to prescribe extraordinarily high monetary stimulus, but recognizes that, due to issues of prudence and financial stability, the remaining space for the use of monetary policy, if any, should be small. Consequently, potential future adjustments to the current stimulus level would occur with additional phasing and will depend on the perception of the fiscal trajectory, as well as new information that would change the COPOM’s current assessment of prospective inflation,” the statement noted.

The SELIC rate has remained at its lowest level since official records began in 1986 by the Central Bank. Between October 2012 and April 2013, the rate was maintained at 7.25 percent per year and began to be gradually readjusted to reach 14.25 percent per year in July 2015. In October 2016, the COPOM again reduced basic interest rates until it reached 6.5 percent per year in March 2018, only to be reduced again in July 2019.

Inflation

The SELIC is the Central Bank’s main instrument for keeping official inflation under control, as measured by the National Wide Consumer Price Index (IPCA). In the 12 months ended in August, the indicator closed at 2.44 percent. The index has been experiencing an acceleration since July, but still remains below the minimum target level set by the National Monetary Council (CMN).

For 2020, the CMN has set an inflation target of four percent, with a tolerance margin of 1.5 percentage points. Consequently, the IPCA should not exceed 5.5 percent this year or fall below 2.5 percent. The target for 2021 was set at 3.75 percent, also with a tolerance range of 1.5 percentage point plus or minus.

In the Inflation Report, released in late June by the Central Bank, the monetary authority estimated that the IPCA would close the year at 2.4 percent in the baseline scenario. This scenario considers market estimates.

However, the projection was out of step with the Covid-19 pandemic. According to the Focus Bulletin, a weekly survey of financial institutions released by the Central Bank, official inflation should close the year at 1.94 percent.

Cheaper credit

The decline in the SELIC rate boosts the economy because lower interest rates cheapen credit and encourage production and consumption in a low economic activity context. In the last Inflation Report, the Central Bank projected a 6.4 percent contraction for the economy this year. This was the Central Bank’s first official projection, revised after the worsening of the crisis caused by the novel coronavirus.

The market projects a slightly lesser contraction. According to the latest issue of the Focus Bulletin, economic analysts project a 5.66 percent contraction in Gross Domestic Product (GDP, the sum of goods and services produced by the country) in 2020.

The basic interest rate is used in negotiations of public securities in the Special Settlement and Custody System (SELIC) and serves as a reference for other interest rates in the economy. By adjusting it upwards, the Central Bank restrains the excess demand that puts pressure on prices, because higher interest rates make credit more expensive and encourage savings.

By reducing basic interest rates, COPOM cheapens credit and encourages production and consumption, but weakens inflation control. To cut the SELIC, the monetary authority needs to be sure that prices are under control and not at risk of rising. The COPOM meetings occur every 45 days. By the end of 2020, two more meetings of the agency are planned to set the value of the SELIC rate.

Source: Agência Brasil