Unanimously, the Monetary Policy Committee (Copom) maintained the rate Selic, the economy's basic interest rate, at 13,75% per year. The decision was expected by financial analysts.
The rate remains at its highest level since January 2017, when it was also at 13,75% per year. This was the second time in a row that the Central Bank has not changed the rate, which has remained at this level since August. Previously, Copom had 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 of last year, Copom raised the rate by 0,75 percentage points at each meeting. In early August, the Central Bank began to increase the Selic rate by 1 point at each meeting. With rising inflation and worsening tensions in the financial market, the Selic rate was raised by 1,5 points from October of last year to February of this year. 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 rising 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 lowered 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 rate is the Central Bank's main instrument for keeping official inflation, measured by the Broad National Consumer Price Index (IPCA), under control. In September, the indicator closed at 7,17% in the 12-month period, after having fallen to . This was the third consecutive month of negative inflation, due to the fall in the price of energy and gasoline.
Despite the recent slowdown, the value is above the inflation target ceiling. For 2022, the National Monetary Council (CMN) set an inflation target of 3,5%, with a tolerance margin of 1,5 percentage points. The IPCA, therefore, could not exceed 5% this year nor fall below 2%.
In the Inflation Report released at the end of September by the Central Bank, the monetary authority estimated that the IPCA would close 2022 at 5,8% in the baseline scenario. The projection, however, may be revised depending on the evolution of fuel prices in the final quarter of the year. The new version of the report will be released in December.
Market forecasts are more optimistic. According to the Focus bulletin, a weekly survey of financial institutions released by the Central Bank, official inflation is expected to close the year at 5,6%. At the beginning of June, market estimates reached 9%.
More expensive credit
Raising the Selic rate helps 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 its latest Inflation Report, the Central Bank projected 2,7% growth for the economy in 2022.
The market is projecting slightly higher growth. According to the latest edition of the Focus bulletin, economic analysts predict a 2,76% expansion in the Gross Domestic Product (GDP, the sum of goods and services produced by the country) this year.
The basic interest rate is used in public bond negotiations in the Special Settlement and Custody System (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 encourage 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.
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