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

This Monday (19), the Minister of Finance, Fernando Haddad, said that interest rates should have started to fall in March. Since the beginning of the year, President Luiz Inacio Lula da Silva also criticizes interest rates. In January, he stated that the current level of the Selic rate hinders investments and that there is no justification for the Selic to be at this level at the moment.

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 a monetary tightening are felt in the slowdown of the economy.

According to the most recent edition of the Focus bulletin, a weekly survey of market analysts, the base rate should be maintained at 13.75% per annum for the seventh consecutive time. The expectation of the financial market, however, is that the Selic ends the year at 12.25% per annum. This Wednesday (21), at the end of the day, the Copom will announce its decision.

In the minutes of the last meeting, in May, the agency informed that the interest rate decision requires patience and serenity. Once again, the Copom reinforced the possibility of raising the Selic rate, “despite being a less likely scenario”. For the BC, the approval of the fiscal framework can help balance public accounts, which impact on inflation expectations.

After rising at the beginning of the year, inflation expectations have fallen. According to latest Focus bulletinthe inflation estimate for 2023 increased from 5.42% to 5.12%.

In May, driven by the fall in the prices of fuel and household items, the IPCA fell to 0.23%, according to the Brazilian Institute of Geography and Statistics (IBGE). With the result, the indicator accumulated a rise of 2.95% in the year and 3.94% in the last 12 months, a lower percentage than the 4.18% accumulated up to the previous month.

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. The goal for 2026 will be set this month.

not last Inflation Report, released at the end of March by the BC, the monetary authority recognizes the possibility of bursting the inflation target this year. In the document, the estimate is that the IPCA will reach 5.8% in 2023. The next report will be released at the end of the month.