The Monetary Policy Committee (Copom) of the Central Bank (BC) starts today (1st), in Brasília, the first meeting of the year to define the basic interest rate, the Selic. For the first time in five years, interest rates are expected to reach double digits. Tomorrow (2), at the end of the day, the Copom will announce the decision.
With the rise in inflation in recent months, the forecast of financial institutions is that the Selic should go up from 9.25% to 10.75% per year at this meeting. The expectation is in the bulletin focus, a survey released every week by the BC. By the end of 2021, the market expects the rate to be 11.75% per year.
Copom members signaled, in the minutes of the last meeting, that they should maintain the Selic increase at the same level of 1.5 percentage points, with a contractionary monetary policy in the face of worsening price indices. Since September, basic interest rates have been rising at this rate.
The main instrument for controlling inflation, the Selic rate continues to rise, 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 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 7.25 percentage points so far.
high inflation
For 2022, the inflation target to be pursued by the BC, defined by the National Monetary Council, is 3.5%, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 2% and the upper limit is 5%.
In the last Inflation Report, released at the end of December by the Central Bank, the monetary authority estimated that, in 2022, the Broad National Consumer Price Index (IPCA), the country’s official inflation, would close the year at 4.7% in base scenario, with Selic at 11.25% per year and exchange rate at R$5.65. The next report will be released in March.
Driven by rising prices for electricity and fuels, the IPCA ended 2020 at 10.06%, the highest annual inflation since 2015. The market forecast is for inflation to end the year at 5.38%, according to the Focus bulletin. It is the 29th consecutive increase in the forecast of financial institutions.
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 rate close to the value defined at the meeting.
When the Copom increases the basic interest rate, the purpose is to contain the heated demand, and this has an impact on prices because higher interest rates make credit more expensive and encourage savings. Thus, higher rates can also hold back economic activity. By reducing the Selic, the tendency is for credit to become cheaper, with an incentive to production and consumption, reducing inflation control and stimulating economic activity.
However, credit interest rates do not vary in the same proportion as the Selic, since it is only 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.
