The Central Bank of Brazil (BC) decided to keep the main interest rate, Selic, at 13.75% per annum this Wednesday (October 26). The decision was unanimous and was expected by the financial market.
In September, the monetary authority ended a sequence of 12 consecutive interest rate hikes, the highest in the 21st century.
The rate has been advanced by 7.25 percentage points (pp) in 2021 and 4.5 percentage points this year, a total readjustment of 11.75 percentage points in the period.
On Wednesday (26 October), Copom (Committee of Monetary Policy) chose not to change Selic’s level for the second time in a row.
The monetary authority has signaled that the percentage should not change until mid-2023.
The Central Bank said in the statement that it will remain vigilant and assess whether the strategy of maintaining the key rate for a sufficiently extended period will manage to maintain the convergence of inflation with the target.
“The committee emphasizes that the next steps of the monetary policy can be adjusted and will not hesitate to restart the adjustment cycle if the disinflation process does not go as expected”, writes the collegium.
MEANING OF COPOM
The committee is formed by the eight directors and the chairman of the Central Bank.
The 9-person composition of the team prevents a tie in monetary policy decisions. They meet every 45 days to set interest rates. The meetings last two days.
According to the schedule, the next meeting will take place on December 6 and 7. Copom’s decision is made public on the second day of the session using a statement on the Central Bank’s website.
The minutes of the meeting are also published on the site up to 4 working days after the date of the meeting. That means, it will be released next Tuesday (November 1).
When setting the Selic (Special Settlement and Custody System) rate, the Central Bank buys and sells federal government bonds to keep interest rates close to the value set at the meeting.
Selic is the main instrument to control the country’s official inflation. The IPCA (National Consumer Price Index) has slowed in the last three months.
The 12-month cumulative rate cooled to 7.17% in September. It was 8.73% in August.
A large part of the rate reduction is due to the measure to cap the ICMS (state-level VAT on sales and services) rate for petrol, electricity and telecommunications.
President Jair Bolsonaro (PL, right) sanctioned the PEC (Proposal to Amend the Constitution) approved by Congress in June.
THE OBJECT OF INFLATION
Even with the loss of steam, inflation is 3.67 percentage points above the inflation target of 3.5%.
The current level is also above the target limit of 5%.
If the year ends above this level, the president of the Central Bank, Roberto Campos Neto, will have to send a public letter explaining the reason for the non-compliance.
According to the law that authorized the autonomy of the Central Bank, it is the main task of the monetary authority to ensure the purchasing power of the population.
Campos Neto had already had to explain in 2021 when inflation reached 10.06%, and the target was 3.75%.
The President of the Central Bank reasoned that oil and energy puts pressure on the price index. Read the full text here.
The latest financial market projections, published in the Focus Bulletin, show that inflation will continue to slow to 5.60% by the end of 2022.
It is still above the 2022 target limit of 5%. Analysts estimate that Selic will end 2022 at 13.75% per year, the current level.
High interest also affects the country’s economic activity because it makes credit more expensive.
Financial market projections show that the country’s GDP (Gross Domestic Product) will grow by 2.76% in 2022.
AN INCREASE OF 11.75% SINCE 2021
Selic’s readjustment cycle began in March 2021, from 2% to 2.75%, and ended in August this year. The jump was 11.75 percentage points.
You remember:
March 2021 – from 2% to 2.75% (+0.75 pp);
May 2021 – from 2.75% to 3.5% (+0.75 pp);
June 2021 – from 3.5% to 4.25% (+0.75 pp);
August 2021 – from 4.25% to 5.25% (+1 pp);
September 2021 – from 5.25% to 6.25% (+1 pp);
October 2021 – from 6.25% to 7.75% (+1.5 pp);
December 2021 – from 7.75% to 9.25% (+1.5 pp);
February 2022 – from 9.25% to 10.75% (+1.5 pp);
March 2022 – from 10.75% to 11.75% (+1 pp);
May 2022 – from 11.75% to 12.75% (+1 pp);
June 2022 – from 12.75% to 13.25% (+0.5 pp);
August 2022 – from 13.25% to 13.75% (+0.5 pp);
Subsequently, the Central Bank chose to keep Selic at the same level in two meetings:
September 2022 – stable at 13.75%;
October 2022 – stable at 13.75%.
Selic’s sequence of increases can be considered the highest in 23 years as the average interest rate in the economy increased from 29.21% per annum in December 1998 to 44.96% in March 1999.
At that time there was a floor and a ceiling for the prime interest rate. In 1999, the inflation target system was established.
Before 2021, Selic recorded five consecutive years of low interest rates.
It fell by 12.25 percentage points in this period, from 14.25% to 2%.
With inflation under pressure from the effects of the Covid-19 pandemic and the war in Russia and Ukraine, the Central Bank raised interest rates by 11.75 percentage points in less than two years.
REAL INTEREST RATE 7.5%
Current interest rates – adjusted for inflation – should be 7.5% over the next 12 months. The projection is from Austin Rating’s chief economist, Alex Agostini.
From February 2021 to October 2022, the rate increased by 13.8 percentage points.
The percentage is high because inflation is falling and the BC (Central Bank) has signaled that it will maintain the key rate, Selic, at 13.75% per annum for an extended period.
The survey was based on the “ex-ante” projection, that is, when annual interest rates are calculated based on forecasts for the next 12 months.
According to the estimate, interest rates were negative for 20 months, from March 2020 to October 2021. It reached its lowest level in February 2021, at -6.3%.
When considering the “ex-post” calculation, when considering estimates for the 12 months before the reference month, Brazil’s real interest rate was 5%. During this period, inflation has been higher and the interest rate has been on an upward trend.
In this calculation, interest rates were negative from October 2020 to July 2022, or 22 months.
The lowest peak was in September 2021, at -6.6%. It increased by 11.6 percentage points to the current October level of 5%.
With information from Poder360
