Brazil keeps benchmark interest rate at 2% a year
Faced with a growth in inflation for food which has started to spread to other sectors, the Central Bank did not change the Brazilian economy’s benchmark interest rate, the Selic. The Monetary Policy Committee (Copom) decided unanimously to retain the Selic rate at two percent a year. The move had been expected by financial analysts.
In a statement, Copom reiterated that the effect of the hike in food prices is temporary, but pointed out that the inflation is likely to remain high in the coming months. “Despite the stronger inflationary pressure in the short term, the committee is maintaining the diagnosis according to which the current impacts are temporary, but it will continue to monitor its evolution attentively, particularly the underlying inflation measures,” the text reads.
Copom estimated that the official inflation will close out the 2020 at 4.3 percent, and slide down to 3.4 percent in 2021 and 2022. This scenario assumes the dollar to start at R$ 5.25 and growing according to the international purchasing power, in addition to the benchmark interest at two percent a year at the end of 2020, three percent a year over the course of 2021, and 4.5 percent a year in 2022.
Today’s (Dec. 9) decision, brings the Selic to the lowest level since the beginning of this time series at the Central Bank, in 1986. In July 2015, the rate reached 14.25 percent a year. In October 2016, the Copom once again slashed the economy’s benchmark interest until it reached 6.5 percent a year in March 2018. In July 2019, Selic was reduced yet again until it reached two percent a year in August this year.
Inflation
The Selic is the Central Bank’s main tool to curb the official inflation, as measured by the National Broad Consumer Price Index—the IPCA. In the 12-month period ended in November, the indicator closed at 4.31 percent. Sped up by the hike in food prices, the IPCA surpasses the center of the target set by the National Monetary Council (CMN) in its 12-month rate. This had not been seen since February this year.
For 2020, CMN fixed the target of the inflation at four percent, with a tolerance margin of 1.5 percentage point. The IPCA, however, must not go beyond 5.5 percent this year or below 2.5 percent. The target for 2021 was established at 3.75 percent, also with a 1.5 percentage point tolerance interval.
In the Inflation Report, published at the end of September by the Central Bank, the monetary authority predicted that the IPCA would close out the year at 2.1 percent in the baseline scenario. The estimate will be brought up to date next week, when the report for December is due.
Cheaper credit
Holding the Selic rate at low levels stimulates the economy, as lower interest makes credit cheaper and encourage production and consumption in a landscape of low economic activity. In the last Inflation Report, published in September, the Central Bank forecast a five percent shrinkage in the economy this year. This was the second official Central Bank projection revised after the beginning of the COVID-19 pandemic.
The market estimates a less significant decline. According to the last issue of the Focus Readout, economic analysts estimate a 4.4 percent contraction in the country’s gross domestic product in 2020.
The benchmark interest rate is used in negotiations of the public securities under the Special System for Settlement and Custody (Selic) and serves as a parameter for the other interest rates in the economy. By increasing it, the Central Bank ensures the surplus in demand that exert pressure on prices, as higher interest makes credit expensive and stimulate saving.
By reducing the benchmark interest, Copom keeps credit cheap and encourages production and consumption, but weakens efforts to maintain the inflation in check. To slash the Selic, the monetary authority needs to be confident prices are under control and do not run the risk of surging.
