Copom maintains the economy’s basic interest rate at 13.75% per year

In a statement, the Copom indicated that there are still risks to inflation, such as possible global pressures on prices and “residual” uncertainties about the vote on the fiscal framework. Unlike the last meetings, the phrase that stated that the Central Bank could raise interest rates again if inflation rose, was removed, but the monetary authority did not say whether or when it intends to cut the Selic rate.

“The committee assesses that the situation demands patience and serenity in the conduct of monetary policy and recalls that future steps of monetary policy will depend on the evolution of inflationary dynamics, in particular on the most sensitive components of monetary policy and economic activity, on inflation expectations , in particular longer-term ones, its inflation projections, the output gap and the balance of risks,” the note said.

The rate remains at the highest level since January 2017, when it was also at 13.75% per annum. This was the seventh time in a row that the Central Bank has not changed the rate, which has remained at this level since August last year. Previously, the Copom raised the Selic rate 12 times in a row, in a cycle that began amid rising food, energy and fuel prices.

From March to June 2021, the Copom raised the rate by 0.75 percentage points at each meeting. At the beginning of August of the same year, the Central Bank began to increase the Selic rate by 1 point at each meeting. With the rise in inflation and the worsening of tensions in the financial market, the Selic was increased by 1.5 points from October 2021 to February 2022. Last year, the Copom promoted two increases of 1 point, in March and May, and two increases of 0.5 points, in June and August.

Before the start of the upward cycle, the Selic had been reduced to 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 dropped the rate to stimulate production and consumption. The rate was at the lowest level in history from August 2020 to March 2021.

Inflation

The Selic is the Central Bank’s main instrument for keeping official inflation under control, as measured by the Extended National Consumer Price Index (IPCA). in may, the indicator closed at 3.94% in the 12 months, below 4% for the first time in two and a half years. In the last two months, inflation has been falling because of food and fuel.

The index closed last year above the ceiling of the inflation target. For 2023, the National Monetary Council (CMN) set an inflation target of 3.25%, with a tolerance margin of 1.5 percentage points. The IPCA, therefore, could neither exceed 4.75% nor remain below 1.75% this year.

In the Inflation Report, released at the end of March by the Central Bank, the monetary authority estimated that the IPCA would close 2023 at 5.8% in the base scenario. The projection, however, must be revised downwards in the new version of the report, which will be released at the end of June.

Market forecasts are more optimistic than the official ones. According to the Focus bulletin, a weekly survey of financial institutions released by the BC, the official inflation should close the year by 5.12%. A month ago, market estimates were at 5.8%.

most expensive credit

Raising the Selic rate helps to control inflation. This is because higher interest rates make credit more expensive and discourage production and consumption. On the other hand, higher rates make it harder for the economy to recover. In the last Inflation Report, the Central Bank projected growth of 1.2% for the economy in 2023.

The market projects greater growth, especially after the announcement that the Gross Domestic Product (GDP, sum of wealth produced) grew 1.9% in the first quarter. According to the latest edition of the Focus bulletin, economic analysts predict expansion of 2.14% of GDP in 2023.

The basic interest rate is used in the negotiation of government securities in the Special System for Liquidation and Custody (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 stimulate 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.