Central Bank to Decide on Wednesday if it Keeps Basic Interest at 6.5 Percent

By Richard Mann, Contributing Reporter

RIO DE JANEIRO, BRAZIL – The Monetary Policy Committee (Copom) of the Central Bank (Banco Central) will hold its third meeting in 2019 today (7th) to set the basic interest rate, (the Selic), currently at 6.5 percent per year. On Wednesday (8th), after the second half of the meeting, the rate will be announced.

Financial institutions consulted by the Central Bank forecast that the Selic should remain at the current level this year.

Copom meets every 45 days. On the first day of the meeting, technical presentations are made on the evolution and perspectives of the Brazilian and world economies and the behavior of the financial market.

On the second day, the members of Copom, formed by the Central Bank’s board of directors, analyze the options and define the Selic.

The Central Bank operates daily through open market operations – buying and selling federal government bonds – to keep the interest rate close to the value defined in the meeting.

Selic, which serves as a reference for other interest rates in the economy, is the average rate charged in negotiations with securities issued by the National Treasury, registered daily in the Special System for Settlement and Custody (Selic).

The maintenance of the Selic at the current level, as expected by the financial market, indicates that Copom considers the previous changes in basic interest rates sufficient to reach the inflation target, an objective that should be pursued by the Central Bank.

By reducing basic interest rates, the trend is to reduce credit costs and encourage production and consumption.

However, credit interest rates do not drop in the same proportion as the Selic rate. According to the Central Bank, this happens because the Selic is only a portion of the credit cost.

To cut the Selic, the monetary authority needs to be certain that prices are under control and do not run the risk of being above the inflation target.

When Copom increases the Selic, the objective is to contain the heated demand, and this causes repercussions on prices because higher interest rates render credit and stimulate savings more expensive.

The inflation target, defined by the National Monetary Council, is 4.25 percent, with a tolerance interval between 2.75 percent and 5.75 percent this year.

Background

From October 2012 to April 2013, the Selic rate was maintained at 7.25 percent per annum and began to be readjusted gradually to reach 14.25 percent in July 2015. In the subsequent meetings, the rate was maintained at this level.

In October 2016, a long cycle of Selic cuts was initiated, when the rate fell 0.25 percentage points to 14 percent per year. This process lasted until March 2018, when Selic reached its historic low of 6.5 percent per year, and after that, it was maintained by Copom in the subsequent meetings.