Brazil’s Central Bank raises benchmark interest rate SELIC to 9.25%, highest in 4 years

RIO DE JANEIRO, BRAZIL – With inflation on the rise and the economy in technical recession, the Central Bank’s Monetary Policy Committee (COPOM) decided to increase the SELIC (the benchmark interest rate) by another 150 percentage points (1.5%) on Wednesday, October 8.

It was the seventh consecutive interest rate hike, after the Central Bank slashed it to a historic low (2%) amid the Covid-19 pandemic. In the 6 previous meetings, the Central Bank raised the rate by 0.75% on 3 occasions, by 1% in August and September, and by 1.5% in October.

With the December decision, the interest rate increase this year reaches 7.25%, the highest the cycle between late 2002 and early 2003. SELIC reached its highest level since September 2017, a time when it was in a loosening cycle after reaching 14.25% amid the 2015 and 2016 crisis.

The rate is therefore at the highest level in the Bolsonaro administration; when the President came to power, the SELIC rate stood at 6.50%.

ECONOMIC IMPACTS

The increase in the economy’s basic interest rate is reflected in higher bank interest charges, although there is a lag between the Central Bank’s decision and the increase in the cost of credit (between 6 to 9 months). The rise in the interest rate also has a negative influence on the population’s consumption and on productive investments.

With double-digit inflation, the approval of the Court-ordered federal debt proposed constitutional amendment (PEC) in Congress (which makes room in the 2022 budget for the new “Auxílio Brasil” to circumvent the spending cap), and the economy in technical recession, yesterday’s decision was widely expected by the financial market.

All 51 institutions consulted expected a 150 p.p. in the rate, to 9.25%. The fiscal assessment is that, although the government’s tactics in terms of the spending cap (which prevents expenses from growing at a rate higher than inflation) are negative, the approval of the PEC at least limits the damage in 2022. Considering the latest changes to the PEC, additional spending of R$106.1 (US$19.2) billion is permissible in 2022, an election year.

REAL INTEREST RATES

With the latest monetary tightening, Brazil continues to have one of the highest real interest rates (discounting inflation) in the world. MoneYou and Infinity Asset Management calculations indicate that the Brazilian real interest rate is now at +5.03% per year. First position is Turkey (+5.83%), Russia is in third (+4.23%). The average of the 40 countries considered is a negative -1.13%.

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