MercoPress. South Atlantic News Agency

Brazil's Copom further lowers Selic interest rate in line with market expectations

“There's nothing to celebrate,” Juvandia Moreira said

Brazil's Monetary Policy Committee (Copom) announced Wednesday that it was further cutting the economy's basic interest rate known as Selic by 0.5 percentage points to 10.75% per year, Agencia Brasil reported.

 The measure was along the lines expected within financial circles but drew nonetheless heavy criticism. The decision was taken given the behavior of prices, it was also explained.

The Copom said in a statement that it should only make a further reduction of 0.5 points at its next meeting in May, which increases the chance that the authority will pause the cycle of cuts from June onwards. In previous texts, the agency indicated that it would continue with the reductions “in the next few meetings.”

According to the statement, the scenario for inflation remains unchanged, with both upside and downside risks. Among the factors that could raise inflation are the persistence of global inflationary pressures and the heating up of the services sector. Among the possible downward factors are a greater-than-expected slowdown in the global economy and stronger-than-expected impacts from interest rate hikes in other countries.

The rate is at its lowest level since March 2022, when it was also at 10.75% per year. From March 2021 to August 2022, the Copom raised the Selic 12 consecutive times, in a cycle of monetary tightening that began amid rising food, energy, and fuel prices. For one year, from August 2022 to August 2023, the rate was kept at 13.75% per year for seven consecutive times.

Before the start of the upward cycle, the Selic had been reduced to 2% per year, the lowest level in the historical series that began in 1986. Because of the economic contraction generated by the Covid-19 pandemic, the Central Bank had lowered the rate to stimulate production and consumption. The rate remained at the lowest level in history from August 2020 to March 2021.

The Selic rate is the Central Bank's main instrument for keeping official inflation under control, as measured by the Broad National Consumer Price Index (IPCA). In February, the index stood at 0.83% and has accumulated 4.5% in 12 months. After successive falls in recent months, inflation has risen slightly again due to food and education services.

The 12-month rate is exactly at the ceiling of the inflation target. For 2024, the National Monetary Council (CMN) set an inflation target of 3%, with a tolerance margin of 1.5 percentage points. The IPCA, therefore, could not exceed 4.5% or fall below 1.5% this year.

In its December Inflation Report, the Central Bank maintained its estimate that the IPCA would close 2024 at 3.5% in the base scenario. The projection, however, may be revised in the new version of the report, which will be released at the end of this month.

Market forecasts are more optimistic than official ones. According to the Focus bulletin, a weekly survey of financial institutions published by the Central Bank, official inflation is expected to close the year at 3.79%, which is below the target ceiling. A month ago, market estimates stood at 3.82%.

The reduction in the Selic rate helps to stimulate the economy because lower interests make credit cheaper and encourage production and consumption. On the other hand, higher rates make it harder to control inflation. The basic interest rate is used in government bond trading on the Special Settlement and Custody System (Selic) and serves as a benchmark for other interest rates in the economy. By adjusting it upwards, the Central Bank curbs the excess demand that puts pressure on prices, because higher interest rates make credit more expensive and encourage savings. To cut the Selic rate, the monetary authority needs to be sure that prices are under control and are not in danger of rising. In its latest Inflation Report, the Central Bank reduced its growth projection for the economy in 2024 to 1.7%.

The market is projecting slightly better growth. According to the latest edition of the Focus bulletin, economic analysts forecast a GDP expansion of 1.8% in 2023.

Despite all this, the Copom's decision has been criticized by industrialists and trade unions who longed for bolder interest rate cuts.

“It's important that the Central Bank understands the Brazilian reality and makes its contribution to the much-needed reduction in the financial costs borne by companies, which accumulate along production chains, and by consumers. Without this urgent change in attitude, it will be more difficult to move forward with the neo-industrialization agenda, which consequently cancels out opportunities for more economic prosperity for the country,” National Confederation of Industry (CNI) President Ricardo Alban said in a statement.

“There's nothing to celebrate, on the contrary. It simply means that the Central Bank has been practicing a monetary policy that is detrimental to the country's development for years. Because, even though it has reached the lowest level in two years, the rate is still high and is holding back the Brazilian economy,” the president of the National Confederation of Financial Workers (Contraf-CUT) and vice-president of the Central Workers' Union (CUT), Juvandia Moreira noted in a separate statement.

For Força Sindical, the 0.5 point drop in the Selic rate is timid and insufficient to boost consumption, create jobs, improve the Gross Domestic Product (GDP), and distribute income. “A little more boldness would bring enormous benefits to the productive sector, which generates jobs and income and has longed for significant growth in the economy. The conformist sameness of the Central Bank technocrats is absurd,” Force president Miguel Torres stressed.