Amid rising food, fuel and energy inflation, the Central Bank (BC) tightened monetary policy belts even further. Unanimously, the Monetary Policy Committee (Copom) raised the Selic rate – the economy’s basic interest rate – from 5.25% to 6.25% per year this Wednesday (22).
The rate is at the highest level since July 2019, when it was 6.5% per year. This was the fifth consecutive readjustment in the Selic rate. From March to June, the Copom had raised the rate by 0.75 percentage points at each meeting. In early August, the BC started to increase the Selic by 1 point at each meeting.
In a statement, the Copom informed that it should raise the Selic again by one percentage point at the next meeting, at the end of October. With the inflation target ceiling blown in 2021, the agency said it works to bring inflation back to the target range in 2022 and, “to some degree”, in 2023.
The “recessive remedy” to try to contain inflation, however, is not a consensus among economists. “Facing the increase in inflation – the responsibility of the Central Bank, at first, and administered prices at a second moment – the remedy to contain the inflationary escalation could not be more stupid: accelerated increase of the basic interest rate, precisely during the period in which, with the relative return of normality, capital flows would already be able to appreciate, once again, our currency”, argues economist Juliane Furno, from Brazil in fact. Read the full text below:
::If inflation is related to costs, why keep raising the basic interest rate?::
Returning to Canco Central’s arguments to increase the cost of credit in the country, the financial agency’s note on Wednesday highlighted: “The Copom considers that, in the current stage of the interest rate hike, this pace of adjustment [um ponto percentual por reunião] it is the most appropriate to ensure the convergence of inflation to the target in the relevant horizon and, simultaneously, allow the Committee to obtain more information on the state of the economy and the degree of persistence of shocks”.
With the decision, the Selic continues in a bullish cycle. From July 2015 to October 2016, the rate remained at 14.25% per year. After that, the Copom again reduced the economy’s basic interest rates until the rate reached 6.5% per annum in March 2018. The Selic was reduced again in August 2019 until reaching 2% per annum in August 2020 , influenced by the economic contraction generated by the covid-19 pandemic. This was the lowest level in the historical series started in 1986.
Selic is the main instrument of the Central Bank to keep official inflation under control, measured by the Broad National Consumer Price Index (IPCA). In August, the indicator closed at the highest level for the month since 2000 and accumulates 9.68% in 12 months, pressured by the dollar, fuels and the rise in electricity.
The value is above the inflation target ceiling. For 2021, the National Monetary Council (CMN) had set an inflation target of 3.75%, with a tolerance margin of 1.5 percentage points. The IPCA, therefore, could not exceed 5.25% this year or be below 2.25%.
No Inflation Report Released at the end of June by the Central Bank, the monetary authority estimated that, in 2021, the IPCA would close the year at 5.82% in the base scenario. Even with a fall in the indices in the second half, this scenario considers the inflation target ceiling overflow in 2021.
The projection is below market forecasts. According to the bulletin Focus, a weekly survey of financial institutions released by the BC, official inflation is expected to close the year at 8.35%. The official projection will only be updated next time Inflation Report, later this month.
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more expensive credit
The increase in the Selic rate, according to the government’s belief, will help to control inflation, via a reduction in consumption. This is because higher interest rates make credit more expensive and discourage production and consumption. On the other hand, higher rates make it difficult for the economy to recover. In the last Inflation Report, the Central Bank projected 4.6% growth for the economy in 2021.
The basic interest rate is used in the negotiation of government bonds in the Special System for Settlement 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.
* With information from Agência Brasil
Edition: Vinícius Segalla