MercoPress. South Atlantic News Agency

Brazil's Copom raises Selic rate to 11.25%

The measure was expected after the US dollar began to rise against the local real

The Monetary Policy Committee (Copom) of Brazil's Central Bank (BCB) Wednesday agreed unanimously to increase the economy's basic interest rate known as Selic by 0.5%age points to 11.25% per year, Agencia Brasil reported. The move was expected within financial circles given the recent rise in the exchange rate between the local real and the US dollar which provided for an inflationary context.

The increase consolidates a cycle of tightening monetary policy. After spending a year at 13.75% a year, between August 2022 and August 2023, the rate was cut six times by 0.5 points and once by 0.25 points, between August last year and May this year. At the June and July meetings, the Copom decided to keep the rate at 10.5% per year, starting to increase the Selic at the September meeting, when the rate went up by 0.25 points.

The Copom said in a statement that uncertainty in the United States had increased. Without directly mentioning the election of former president Donald Trump, the text mentioned “the uncertain economic situation in the United States, which raises greater doubts about the pace of deceleration, disinflation and, consequently, the stance of the Fed [Federal Reserve, US Central Bank]”.

Regarding the domestic scenario, the Copom said it was monitoring fiscal policy and called for adjustments in public spending. “The Committee reaffirms that a credible fiscal policy committed to debt sustainability, with the presentation and implementation of structural measures for the fiscal budget, will contribute to anchoring inflation expectations and reducing risk premiums for financial assets, consequently impacting monetary policy,” the statement read.

The Selic rate is the Central Bank's main instrument for keeping official inflation, as measured by the Broad National Consumer Price Index (IPCA), under control. In September, the Broad National Consumer Price Index (IPCA), considered official inflation, rose to 0.44%. According to the Brazilian Institute of Geography and Statistics (IBGE), this was driven by the red flag on electricity bills and the price of food, which rose due to the drought at the start of the semester. The IPCA for October will only be released on Friday (8).

With the result, the indicator has accumulated a rise of 4.42% in 12 months, closer to the ceiling of this year's target. For 2024, the National Monetary Council (CMN) has 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 the latest Inflation Report, released at the end of September by the Central Bank, the monetary authority raised its forecast for the IPCA in 2024 to 4.31%, but the estimate could rise even further due to the rise in the dollar and the impact of the prolonged drought on prices. The next report will be released at the end of December.

Market forecasts are more pessimistic. 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 4.59%, above the target ceiling. A month ago, market estimates stood at 4.38%.

The Copom communiqué contained the Central Bank's updated inflation expectations. The monetary authority predicts that the IPCA will reach 4.6% in 2024 (above the target ceiling), 3.9% in 2025, and 3.6% in the accumulated 12 months at the end of the first quarter in 2026. This is because the Central Bank is working with what it calls an “extended horizon”, considering the inflation scenario for up to 18 months.

The BCB has increased its inflation estimates. At its previous meeting in September, Copom predicted an IPCA of 4.3% in 2024, 3.7% in 2025, and 3.5% in the accumulated 12 months at the end of the first quarter in 2026

The increase in the Selic rate helps contain inflation because higher interest rates make credit more expensive and discourage production and consumption. On the other hand, higher rates hinder economic growth. In its latest Inflation Report, the Central Bank raised its growth projection for the economy in 2024 to 3.2%. The figure was revised after the 3.1% GDP expansion in 2024.

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.

By reducing the basic interest rate, the Copom cheapens credit and encourages production and consumption, but weakens inflation control. To cut the Selic rate, the monetary authority needs to be sure that prices are under control and are not in danger of rising.