Copom starts third meeting of the year to define basic interest rates

Members of the economic team and President Luiz Inácio Lula da Silva himself claim that high interest rates hinder credit concessions and investments and that there is no justification for the Selic to be, at this moment, at that level. Finance Minister Fernando Haddad has been advocating for greater coordination between fiscal policy (which takes care of collection and public spending) and monetary policy (interest rate to hold inflation).

Although the base rate stopped rising in August last year, it is at the highest level since the beginning of 2017 and the effects of monetary tightening are felt in the rise in credit and economic slowdown.

According to this Tuesday’s edition (2) today of the Focus bulletin, a weekly survey carried out by BC with market analysts, the basic rate should be maintained at 13.75% per year for the sixth time in a row. The expectation of the financial market, however, is that the Selic ends the year at 12.5% ​​per annum.

This Wednesday (3), at the end of the day, the Copom will announce its decision.

In the minutes of the last meeting, in March, the agency did not rule out the possibility of further increases in the Selic rate if the disinflation process does not go as expected. The increase in public spending and fiscal uncertainties could also cause the Central Bank to keep interest rates high for longer than initially anticipated.

The document mentions uncertainties in relation to the fiscal framework, which at the time was still being prepared by the Ministry of Finance. After delivering the text to the National Congress, BC president Roberto Campos Neto made a “super positive” assessment of the new rules that should replace the spending cap and recognized the “effort” of the federal government’s economic team.

Campos Neto also defends the technical decisions of the municipality. In a recent statement, he said that, despite having sometimes failed to meet the inflation targets, Brazil follows a path similar to that of other countries, remaining “most of the time within the band”. According to him, the country registered “seven explosions in 24 years”.

After falls in the last months of 2022, inflation expectations have risen. In the latest Focus bulletin, the inflation estimate for 2023 is 6.05%.

In March, inflation slowed down for all income brackets. Even so, driven by rising fuel prices, the IPCA stood at 0.71%, according to the Brazilian Institute of Geography and Statistics (IBGE). The result is lower than the February rate of 0.84%. In 12 months, the indicator accumulates 4.65%, below 5% for the first time in two years.

For April, the Extended National Consumer Price Index 15 (IPCA-15) – which measures the preview of official inflation – stood at 0.57%. The rate is lower compared to March 2023 (0.69%) and April 2022 (1.73%).

Taxa Selic

The basic interest rate is used in the negotiation of public securities issued by the National Treasury in the Special System for Liquidation and Custody (Selic) and serves as a reference for other rates in the economy. It is the Central Bank’s main instrument for keeping inflation under control. The BC acts daily through open market operations – buying and selling federal public bonds – to keep the interest rate close to the value defined at the meeting.

When the Copom raises the basic interest rate, the purpose is to contain heated demand, and this affects prices because higher interest rates make credit more expensive and stimulate savings. Thus, higher rates can also make it harder for the economy to expand. But, in addition to the Selic, banks consider other factors when defining the interest charged from consumers, such as the risk of default, profit and administrative expenses.

By reducing the Selic rate, the tendency is for credit to become cheaper, encouraging production and consumption, reducing inflation control and stimulating economic activity.

The Copom meets every 45 days. On the first day of the meeting, technical presentations are made on the evolution and perspectives of the Brazilian and world economies and the behavior of the financial market. On the second day, the members of the Copom, formed by the BC’s board, analyze the possibilities and define the Selic.

inflation target

For 2023, the inflation target that must be pursued by the Central Bank, defined by the National Monetary Council, is 3.25%, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 1.75% and the upper limit is 4.75%. For 2024 and 2025, the targets are 3% for both years, with the same tolerance interval.

In the last Inflation Report, released at the end of March by the Central Bank, the monetary authority recognizes that the possibility of exceeding the inflation target this year is 83%. In the document, the estimate is that the IPCA will reach 5.8% in 2023. The next report will be released on June 29th.