Amid the impacts of a possible recession in the United States and the behavior of inflation in Brazil, the Monetary Policy Committee (Copom) of the Central Bank (BC) begins today (25) the seventh meeting of the year to define the basic interest rate , Selic. Tomorrow (26), at the end of the day, the Copom will announce the decision.
According to the most recent edition of the newsletter focusweekly survey with market analysts, the Selic should be maintained at 13.75% per year for the second time in a row. Market analysts expect the rate to remain at that level until mid-2023.
In the minutes of the last meeting, Copom members indicated that they intended to maintain the Selic rate, but did not exclude the possibility of further readjustments, if inflation persists in the medium term. At the lowest level in history until March 2021, when it was at 2% per year, the Selic was successively readjusted until reaching 13.75% per year in August. In September, the rate was maintained at this level.
After rising in recent months, inflation expectations have fallen. The latest edition of report card focus reduced the official inflation forecast by the Broad National Consumer Price Index (IPCA) from 5.62% to 5.6% in 2022. In June, 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 has faced the highest inflation in the last 41 years, has caused strong volatility in the dollar rate 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 bound is 2% and the upper bound is 5%. Market 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 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 again 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 last year, until it reached 13.75% a year in August this year.
Selic rate
The basic interest rate is used in the negotiation of public securities issued by the National Treasury in the Special System of 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 increases the basic interest rate, it intends to contain the heated demand, causing reflections on prices because higher interest rates make credit more expensive and stimulate 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, credit interest rates do not vary in the same proportion as the Selic, as the rate 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. However, because of the November 2nd holiday, the meeting was brought forward to the last week of October. 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.
