With the possibility of division among its members, the Monetary Policy Committee (Copom) of the Central Bank (BC) will decide this Wednesday (17) whether to maintain or raise the basic interest rate, the Selic. The recent rise in the dollar and the impact of the drought on the price of energy and food have led to uncertainty as to whether the committee will raise the basic interest rate for the first time in more than two years.
In the statement from the last meeting, at the end of July, Copom reported that the economic scenario inside and outside Brazil requires caution. According to the most recent edition of the Focus bulletin, a weekly survey of market analysts, the basic rate should rise by 0.25 percentage points at this meeting and close 2024 at 11.25% per year.
This Wednesday, at the end of the day, Copom will announce its decision. The last interest rate hike occurred in August 2022, when the rate rose from 13.25% to 13.75% per year. After spending a year at this level, the rate had six 0.5 point cuts and one 0.25 point cut, between August of last year and May of this year. At its meetings in June and July, Copom decided to keep the rate at 10.5% per year, the lowest level since February 2022.
Inflation
In the minutes of the most recent meeting, Copom reported that was considering raising interest rates due to the appreciation of the dollar and the increase in public spending. The members of the board stated that the time is “still one of greater caution and diligent monitoring of the determinants of inflation”.
According to the latest Focus bulletin, the inflation estimate for 2024 rose from 4.22% four weeks ago to 4.35%. This represents inflation increasingly close to the ceiling of the target set by the National Monetary Council (CMN), of 3% for this year, and could reach 4.5% due to the 1.5-point tolerance range.
In August, the Broad National Consumer Price Index (IPCA), considered the official inflation, was negative by 0.02%the first deflation since June 2023. The relief, however, is temporary.
Inflation turned negative in August because of falling energy prices, which will rise from September because of the red tariff flag. Furthermore, last week, Finance Minister Fernando Haddad admitted that the prolonged drought will impact food prices. On that occasion, the minister argued that the food supply shock should not be resolved through interest rates.
In recent months, according to the Brazilian Institute of Geography and Statistics (IBGE), food and services have been driving inflation. As a result, the IPCA has accumulated an increase of 4.24% in 12 months, within the target for 2024, but close to the ceiling.
Selic rate
The basic interest rate is used in negotiations of government bonds issued by the National Treasury in the Special Settlement and Custody System (Selic) and serves as a reference for other rates in the economy. The Selic is the Central Bank’s main instrument for keeping inflation under control. The BC acts 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 Copom raises the basic interest rate, the aim is to curb heated demand, and this has an impact on prices because higher interest rates make credit more expensive and encourage savings. Therefore, higher rates can also hinder economic growth. However, in addition to the Selic rate, banks consider other factors when setting the interest rates charged to consumers, such as default risk, profits and administrative expenses.
By reducing the Selic rate, the tendency is for credit to become cheaper, encouraging production and consumption, reducing inflation control and stimulating economic activity.
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 global economies and the behavior of the financial market. On the second day, the members of the Copom, formed by the board of directors of the Central Bank, analyze the possibilities and define the Selic rate.
Goal
For this year, the inflation target that the Central Bank must pursue, as defined by the National Monetary Council, is 3%, with a tolerance range of 1.5 percentage points up or down. In other words, the lower limit is 1.5% and the upper limit is 4.5%. For 2025 and 2026, the targets are also 3% for both years, with the same tolerance range.
In the latest Inflation Report, released at the end of June by the Central Bank, the monetary authority maintained the forecast that the IPCA ends 2024 at 4%but the estimate was released before the rise in the dollar and the impact of the prolonged drought. The next report will be released at the end of September.
