MercoPress. South Atlantic News Agency

Brazil lowers Selic basic interest rate

Further Selic cuts are expected in the coming months

Brazil's Monetary Policy Committee (Copom) unanimously decided Wednesday to cut down the country's basic interest rate known as Selic by 0.5 percentage points to 11.25% per year, Agencia Brasil reported.

Copom said in a statement that it planned to keep reducing the Selic rate by 0.5 percentage points in future meetings. At the December Inflation Report press conference, Central Bank President Roberto Campos Neto pointed out that Copom always refers to the next two meetings when it mentions the expression “next meetings,” which indicates that the cuts will continue until at least May, the news service also pointed out.

“If the expected scenario is confirmed, the members of the committee unanimously foresee a reduction of the same magnitude at the next meetings and assess that this is the appropriate pace to maintain the contractionary monetary policy necessary for the disinflationary process,” read Copom's statement. As for when the cuts will be stopped, it will depend on the “longer-term” economic scenario, it was explained.

The rate is at its lowest level since March 2022, when it was 10.75% per year. From March 2021 to August 2022, Copom raised the Selic 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 kept at 13.75% per year for seven consecutive times.

Before the start of the upward cycle, the Selic had been reduced to 2% per year, the lowest level in the historical series that began in 1986. Because of the economic contraction generated by the Covid-19 pandemic, the Central Bank lowered the rate to stimulate production and consumption. The rate remained at the lowest level in history from August 2020 to March 2021.

The Selic rate is the Central Bank's main instrument for keeping official inflation, as measured by the Broad National Consumer Price Index (IPCA), under control. In 2023, the indicator stood at 4.62%. After successive falls at the end of the first half, inflation rose again in the second half of the year, but this increase was expected by economists.

The index ended last year below the ceiling of the inflation target, which was 4.75%. 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% or fall below 1.5% this year.

In the Inflation Report released at the end of December by the Central Bank, the monetary authority maintained its 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 March.

Market forecasts are more optimistic than the official ones. According to the Focus bulletin, a weekly survey of financial institutions published by the Central Bank, official inflation is expected to close the year at 3.81%, which is below the target ceiling. A month ago, market estimates stood at 3.9%.

The reduction in the Selic rate helps to stimulate the economy because lower interest rates make credit cheaper and encourage production and consumption. On the other hand, lower rates make it harder to control inflation. In its latest Inflation Report, the Central Bank reduced its growth projection for the economy in 2023 to 1.7%.

(Source: Agencia Brasil)