Amid the impacts of the war in Ukraine on the global economy, the Central Bank (BC) continued to tighten its belts on monetary policy. Unanimously, the Monetary Policy Committee (Copom) raised the Selic rate, the economy’s basic interest rate, from 12.75% to 13.25% per year. The decision was expected by financial analysts.
The rate is at the highest level since January 2017, when it was 13.75% per year. This was the 11th consecutive readjustment in the Selic rate. Despite the increase, the BC reduced the pace of monetary tightening. After two consecutive increases of 1 percentage point, the rate was raised by 0.5 point.
From March to June of last year, the Copom had raised the rate by 0.75 percentage point in each meeting. At the beginning of August, the BC started to increase the Selic by 1 point at each meeting. With the rise in inflation and the worsening of tensions in the financial market, the Selic rose by 1.5 points from December last year to May this year.
With today’s decision (16), 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. The Selic was reduced again in August 2019 until reaching 2% per year in August 2020 , influenced by the economic contraction generated by the covid-19 pandemic. This was the lowest level of the historical series started in 1986.
Inflation
The Selic is the Central Bank’s main instrument to keep official inflation under control, as measured by the Broad National Consumer Price Index (IPCA). In May, the indicator closed at 11.73% in the 12-month period, the highest level for the month since 2015. Despite the drop in electricity prices, due to the end of tariff flags, inflation continues to be pressured by fuels.
The value is well above the inflation target ceiling. For 2022, the National Monetary Council (CMN) set an inflation target of 3.5%, with a tolerance margin of 1.5 percentage points. The IPCA, therefore, could not exceed 5% this year nor remain below 2%.
At the Inflation Report released at the end of March by the Central Bank, the monetary authority estimated that the IPCA would close 2022 by 7.1% in the base case. The projection, however, is outdated with the prolonging the war between Russia and Ukraine , which raise the price of oil. The new version of the report will be released later this month.
Market forecasts are more pessimistic. According to the bulletin focusweekly survey with financial institutions released by the BC, official inflation should close the year by 9%. The survey is suspended because of the strike by Central Bank servers, but an update was released last week.
most expensive credit
The increase in the Selic rate helps to control inflation. This is because higher interest rates make credit more expensive and discourage production and consumption. On the other hand, higher rates make it difficult for the economy to recover. In the last Inflation Reportthe Central Bank projected 1% growth for the economy in 2022.
The market projects slightly higher growth. According to the latest issue of the newsletter focuseconomic analysts predict expansion of 1.5% of Gross Domestic Product (GDP, sum of goods and services produced by the country) this year.
The basic interest rate is used in the negotiation of public securities in the Special System of Settlement and Custody (Selic) and serves as a reference for other interest rates in the economy. By readjusting it upwards, the Central Bank holds back the excess demand that puts pressure on prices, because higher interest rates make credit more expensive and encourage savings.
By reducing basic interest rates, the Copom makes credit cheaper and encourages production and consumption, but weakens control over inflation. To cut the Selic, the monetary authority needs to be sure that prices are under control and are not at risk of rising.
infographic_selic – ArtDJOR
