Amid the impacts of a possible recession in the United States and the evolution of inflation after the drop in gasoline prices in Brazil, the Monetary Policy Committee (Copom), of the Central Bank (BC), starts today (2), in Brasília , the fifth meeting of the year to define the basic interest rate, the Selic. Tomorrow (3), at the end of the day, the Copom will announce the decision.
In the estimates of financial institutions, the committee should end the cycle of interest rate increases, despite the current pressures on inflation. According to the most recent edition of the Focus bulletin, a weekly survey with market analysts, the Selic should increase from 13.25% to 13.75% per year, up 0.5 percentage point. Market analysts expect the rate to remain at that level until the end of the year.
In the minutes of the last meeting, Copom members indicated that they intended to increase the Selic rate once again by 0.5 or 0.25 percentage points, but left open the possibility of promoting new highs if inflation persists.
Until May, BC communiqués indicated that the monetary authority intended to end the cycle of increases in June. However, the higher-than-expected hikes promoted by the Federal Reserve (Fed, Central Bank of the United States) and the European Central Bank added pressure on Brazilian interest rates.
After rising in recent months, inflation estimates have fallen. The latest issue of the Focus bulletin reduced the forecast of inflation official by the Broad National Consumer Price Index (IPCA) from 8.89% to 9% in 2022. In June, the projections for the IPCA reached 9%.
While gasoline and electricity have become cheaper in recent months, the war between Russia and Ukraine continues to impact prices for diesel, fertilizer and other imported goods. In addition, the instability in the US economy, which is facing the highest inflation in the last 41 years, causes strong volatility in the value of the dollar across the planet.
For 2022, the inflation target that must be pursued by the BC, defined by the National Monetary Council, is 3.5%, with a tolerance interval of 1.5 percentage points upwards or downwards. That is, the lower limit is 2% and the upper limit is 5%. Analysts believe that the target ceiling will be breached for the second year in a row.
money squeeze
The main instrument for controlling inflation, the Selic continues in an upward cycle, after going six years without being raised. From July 2015 to October 2016, the rate remained at 14.25% per year. After that, the Copom again reduced the economy’s basic interest rates until the rate reached 6.5% per year in March 2018.
In July 2019, the Selic was reduced again until it reached the lowest level in history in August 2020, at 2% per year. It started to rise again in March of last year, having increased by 11.25 percentage points so far.
Selic rate
The basic interest rate is used in the negotiation of public securities issued by the National Treasury in the Special System for Settlement and Custody (Selic) and serves as a reference for other rates in the economy. It is the Central Bank’s main instrument to keep inflation under control.
The BC operates daily through open market operations – buying and selling federal government bonds – to keep the interest rate close to the value defined at the meeting.
When the Copom raises the basic interest rate, it intends to contain the heated demand, causing reflections on prices because higher interest rates make credit more expensive and encourage savings. Thus, higher rates hold back economic activity.
By reducing the Selic, the tendency is for credit to become cheaper, with incentives for production and consumption, reducing inflation control and stimulating economic activity.
However, interest rates on credit do not vary in the same proportion as Selic, as Selic is only a part of the cost of credit. Banks also consider other factors when defining the interest charged to consumers, such as default risk, profit and administrative expenses.
The Copom meets every 45 days. On the first day of the meeting, technical presentations are made on the evolution and prospects of the Brazilian and world economies and the behavior of the financial market. On the second day, members of the Copom, formed by the BC board, analyze the possibilities and define the Selic.
