Amidst the impacts of the war in Eastern Europe and the nervousness in the international financial market, the Monetary Policy Committee (Copom) of the Central Bank (BC) starts today (14) the fourth meeting of the year to define the basic interest rate, the Selic Tomorrow (15), at the end of the day, the Copom will announce the decision.
In the estimates of financial institutions, the Copom should end the cycle of interest rate increases, despite the current pressures on inflation. According to the most recent edition of the Focus newsletter, a weekly survey with market analysts, the Selic rate should rise from 12.75% to 13.25% per year, with a rise of 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 had signaled that they intended to conclude the Selic high cycle because the increases in recent months are still being felt by the market. However, the war between Russia and Ukraine started to impact Brazilian inflation, through the increase in fuel, fertilizers and other imported goods. In addition, the instability in the US economy, which is facing the highest inflation in the last 40 years, has raised the dollar rate across the planet.
The financial market felt the impact of the external economy. The latest edition of Focus bulletin raised the official inflation forecast by the Broad National Consumer Price Index (IPCA) from 8.89% to 9% in 2022
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 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 risen 10.75 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 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 an incentive to 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.
