Market Expects Further 0.25 Percentage Point Reduction in Brazil’s Basic Interest Rate

RIO DE JANEIRO, BRAZIL – The financial market expects a 0.25 percentage point reduction in the basic interest rate (Selic), this week. Currently, the Selic stands at 6.5 percent per year. On Tuesday, July 30th, and Wednesday, July 31st, the Central Bank’s Monetary Policy Committee (Copom) meets for the fifth time in the year to set the rate.

According to a Central Bank survey released on Monday, July 29th, the expected reduction for this week will be followed by further cuts of 0.25 percentage point in this year’s Copom meetings: in September, October, and December.

The market expectation is that Selic will close 2019 at 5.5 percent per year. The forecast for the end of 2020 has been changed from 5.75 percent to 5.5 percent per year. The forecast for the end of 2021 and 2022 stands at seven percent per year.

The basic interest rate is the main tool used by the Central Bank to control inflation, which, according to analysts’ forecasts, is below the central target set by the National Monetary Council for 2019 and 2020.

Inflation

The inflation target for 2019 is 4.25 percent, with a tolerance range between 2.75 percent and 5.75 percent. Financial institution analysts forecast that inflation, as measured by the Broad National Consumer Price Index (IPCA), will end the year at 3.80 percent. In the previous study, the estimate was 3.78 percent, according to the Central Bank’s weekly financial market research.

The projection for 2020 remains at 3.90 percent. The target for next year is four percent, with a tolerance range of 1.5 percentage points up or down.

For 2021, the target 3.75 percent, also with a tolerance range of 1.5 percentage points. For 2022, the target is 3.5 percent, with a tolerance of 1.5 percentage points up or down. In both years, inflation is expected to be at the center of the target goal, at 3.75 percent and 3.5 percent, respectively.

By using the Selic for controlling inflation and thus reaching the target, the Central Bank impacts economic activity. When Copom reduces the Selic rate, the trend is for credit to become cheaper, encouraging production and consumption, thus boosting economic activity.

When the Monetary Policy Committee (Copom) increases the Selic rate, the purpose is to contain heated demand, and this is reflected in prices because the higher interest rates increase the cost of credit and encourage savings.

The Selic reduction is expected at a time of slow recovery in the Brazilian economy. The financial market projection for GDP growth is 0.82 percent this year, the same as last week. The estimate has been reduced 20 consecutive times and has stalled at the current level for the past week.

For 2020, the forecast is for higher GDP growth: 2.10 percent, followed by growth of 2.5 percent in 2021 and 2022.