The recent rise in the dollar and the increase in uncertainty caused the Central Bank (BC) to reduce the rate of interest cuts. By 5 votes to 4, the Monetary Policy Committee (Copom) reduced the Selic rate, the economy’s basic interest rate, by 0.25 percentage points, to 10.5% per year. The decision was expected by financial analysts.
This was the seventh consecutive time that Copom reduced the Selic. However, the speed of cuts has slowed down. From August last year until March this year, the Copom had reduced basic interest rates by 0.5 percentage points at each meeting.
The president of the BC, Roberto Campos Neto, broke the tie by voting for a cut of 0.25 points. In addition to Campos Neto, the following directors voted for this reduction Carolina de Assis Barros, Diogo Abry Guillen, Otávio Ribeiro Damaso and Renato Dias de Brito Gomes, appointed by the previous government. The following members voted for a reduction of 0.50 percentage points: Ailton de Aquino Santos, Gabriel Muricca Galípolo, Paulo Picchetti and Rodrigo Alves Teixeira, appointed by the current government.
In a statement, the Copom reported that the international scenario has worsened and that underlying inflation, which eliminates more volatile prices, is above the inflation target. Furthermore, the statement argued that the fiscal framework approved last year has credibility. Unlike the last reductions, the Central Bank has not given any indication about what it will do in the next meetings.
“The committee closely monitored recent developments in fiscal policy and their impacts on monetary policy. The committee reaffirms that a credible fiscal policy committed to debt sustainability contributes to anchoring inflation expectations and reducing risk premiums on financial assets, consequently impacting monetary policy”, highlighted the text.
The rate is at its lowest level since February 2022, when it was 9.75% per year. From March 2021 to August 2022, the Copom raised the Selic rate 12 consecutive times, in a cycle of monetary tightening that began amid rising food, energy and fuel prices. For one year, from August 2022 to August 2023, the rate was maintained at 13.75% per year for seven consecutive times, when it began to be reduced.
Before the start of the rising cycle, the Selic was at 2% per year, at the lowest level in the historical series that began in 1986. Due to the economic contraction generated by the covid-19 pandemic, the Central Bank had lowered the rate to stimulate production and consumption. The rate was at the lowest level in history from August 2020 to March 2021.
Inflation
Selic is the Central Bank’s main instrument for keeping official inflation under control, measured by the Broad National Consumer Price Index (IPCA). In March, the indicator was 0.16% and accumulated 3.93% in 12 months. After a rebound in February, inflation slowed down in March, driven by food, beverages and transportation.
The 12-month index is exactly at the ceiling of the inflation target. For 2024, the National Monetary Council (CMN) set an inflation target of 3%, with a tolerance margin of 1.5 percentage points. The IPCA, therefore, could not exceed 4.5% nor remain below 1.5% this year.
At the Inflation Report released at the end of March by the Central Bank, the monetary authority maintained the estimate that the IPCA would close 2024 at 3.5% in the base scenario. The projection, however, may be revised in the new version of the report, which will be released at the end of June.
Market forecasts are more optimistic than official ones. According to the bulletin Focus, a weekly survey of financial institutions released by the BC, official inflation is expected to close the year at 3.73%, therefore below the target ceiling. A month ago, market estimates were at 3.76%.
Cheaper credit
Reducing the Selic rate helps stimulate the economy. This is because lower interest rates make credit cheaper and encourage production and consumption. On the other hand, lower rates make it more difficult to control inflation. In the last Inflation Reportthe Central Bank increased its growth projection for the economy in 2024 to 1.9%.
The market projects slightly better growth. According to the latest edition of the bulletin Focuseconomic analysts predict an expansion of 2.05% of GDP in 2024.
The basic interest rate is used in public bond negotiations in the Special Settlement and Custody System (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 inflation control. 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
