Copom meets this Wednesday to define the Selic rate; understand what it means

This Wednesday (16), the Central Bank’s Copom (Monetary Policy Committee) will meet to define the new Selic rate. Between August 2020 and March 2021, it was at its lowest level in history, at 2% pa

However, since then, it has suffered successive increases, and the expectation is that there will be a new increase. At the last meeting, in February, the rate crossed double digits for the first time since 2017.

To understand what Selic is and what its impact is on people’s lives, Magnifying glass consulted the Central Bank and spoke with specialists to answer the main questions on this topic.

What is Selic?

The Selic is the economy’s basic interest rate. This means that it is a reference value for setting the interest charged by financial institutions. The real value is not exactly the same as that fixed by the Central Bank, and may be higher or lower.

Its name comes from the acronym Selic (Special System of Settlement and Custody). This system is a Central Bank platform where the purchase and sale of federal public securities are carried out. The offer of these bonds is as if the State were borrowing from investors (which can be individuals, companies or banks) to pay off its debts. The average interest charged by the government for the money borrowed corresponds to the Selic rate.

According to the BC, this is its main tool for controlling inflation. This is because it directly interferes with borrowing or using credit. If the interest rate is high, it becomes more expensive to borrow money and, therefore, there is pressure to reduce consumption. If there is a decrease in demand for the acquisition of goods and services, the tendency is for inflation to fall or stagnation.

The effect on inflation, however, is not immediate. According to Juliana Inhasz, professor and coordinator of undergraduate economics at Insper, and Joelson Sampaio, professor of economics at FGV EESP, the result begins to be noticed in a period between six and eight months after the determination of the new Selic target. For this year, Joelson Sampaio estimates that the impact will be felt during the second quarter. “The rate [Selic] was at a very low level last year. The increases were gradually implemented. The significant increase took place in the last three months”, he explains.

Juliana Inhasz, professor at Insper, highlights that the index set by Copom is a goal. Therefore, it is not only the announcement of the new value that promotes the reduction of inflation, there are other factors that are necessary for this to occur: such as the reactivation of the economy, reduction of unemployment and the attraction of money to the public coffers.

She says that currently two issues must be observed: fiscal policy and the administrative structure of the State. “Rethinking taxation in Brazil is showing some appreciation for the fiscal condition. There is no right formula, but we must discuss how we can make taxation more predictable and efficient. if you think about the structure of the State, about government spending, make it more transparent. Because that way it is possible to attract more investors and more capital”, says the professor.

How is the Selic defined?

The Selic rate is set by the Copom, which is made up of the president (currently Roberto Campos Neto) and eight directors of the Central Bank. The committee meets every 45 days to discuss the economic situation and decide whether to change the current Selic rate.

The experts consulted by Magnifying glass assess that the factor that most influences the setting of the Selic is inflation. But other issues interfere in its definition, such as job creation, productivity and economic activity. As a rule, internal factors impact its value more than external ones (dollar value, oil price, etc).

“The BC basically considers two factors: economic activity and inflation. When we have high inflation, as seen in 2021, the interest rate is increased to try to cool inflation. This is the criterion”, says Joelson Sampaio, professor of economics from FGV. “The reverse logic also happens: in the first year of the pandemic, in which we had very low economic activity and relatively little inflation, the BC lowered the Selic rate to stimulate consumption”, he explains.

Why is Selic increasing?

According to the statement made by the BC, the last increase in the Selic rate was due to these factors:

• Inflation: consumer prices continue to grow, according to the BC. Thus, there is greater pressure to increase interest rates to try to reduce consumption.

• Labor market: BC indicated that in the fourth quarter of 2021 a slight improvement was observed in the labor market. This means that a little more jobs were generated, which contributes to the normalization of consumption and production;

• High inflation in the US: high prices in the US could trigger higher interest rates in the country and make it more attractive to investors, which could hamper emerging economies’ financing of public debt. If this happens, the tendency is that fewer dollars will enter Brazil and, therefore, the foreign currency will appreciate against the real, contributing to the increase in production costs and hindering the containment of Brazilian inflation;

• New wave of Covid-19: generates uncertainties about the recovery of national and global economies.

Can the Selic increase even more?

According to BC expectations, there is an expectation that this could happen. It should reach 12% pa in the first semester and end the year at 11.75% pa This is due to inflation. The projection made by the Central Bank is that the inflation target for 2022 is set at 5.4%, a scenario that will still pressure for the containment of consumption in the country.

Is it true that, recently, the Selic rate was at the lowest level in history?

Yes. The Selic rate reached 2% per year between August 2020 and March 2021. Between July 2015 and August 2016 — it was 14.25%, the highest level since 2006. After that period, it dropped gradually until reaching the 2% level. The current model for defining the nominal interest rate by the Copom started in March 1999.

Does Brazil have the highest interest rate in the world?

Currently, Brazil’s nominal interest rate is ranked 20th in the Trading Economics ranking, which has 168 countries. It is at 10.75% pa The highest is from Zimbabwe (60% pa), followed by Venezuela (58.35% pa), Argentina (40% pa) and Yemen (27% pa). The lowest are from Japan (-0.1% pa), Denmark (-0.6% pa) and Switzerland (-0.75% pa).

Does the Selic rate affect Brazilian public accounts? How?

Yes. Interest paid by the Government to investors who bought federal government bonds is set by the Selic rate. The sale of these papers is like loans taken by the State to finance its debts. As with loans, the Union must pay the money it borrowed after a specified period with interest correction. Thus, if the Selic rate is high, the amount owed to market agents is higher — that is, the higher the rate, the higher the interest paid by the government.

On the other hand, public bonds become more advantageous for those who invest. This triggers the inflow of money into the public coffers. “Investors have two options: they can stay here or take their money abroad. The increase in interest rates makes Brazil more attractive as an investment option for foreign market agents”, says Juliana Inhasz, an economics professor at the Insper. An inflow of foreign resources can have a positive impact on economic activity due to its effect on the exchange rate, which also affects public accounts.

How does this affect the lives of ordinary people?

For ordinary people, the immediate effect is on access to credit and borrowing. In situations where the Selic rate is high, borrowing money becomes more expensive, because the interest that banks pay in transactions with each other becomes more expensive — and financial institutions pass this increase on to the common consumer.

Insper professor Juliana Inhasz explains that borrowing money between financial institutions is commonplace. On days when there is greater outflow of money from banks than inflow, they trigger their peers to make short-term loans so as not to close their cashiers in the red.

A daily interest rate is charged for this transaction, which, when annualized, corresponds to the Selic rate. Therefore, if the interest rate is high, these interbank operations are also more expensive. “The bank passes this cost on to the customer,” he says. “It is the same relationship that governs a manufacturer of consumer goods, which increases the price of its product when the costs to produce it increase”, he concludes.

The idea is that with higher interest rates, people will be discouraged from consuming — because loans and credit are more expensive. On the other hand, there is an incentive for consumers to save money, since savings start to yield more and the purchase of federal government bonds also becomes more advantageous. Therefore, the expectation is that the reduction in demand will press for the fall of prices and, therefore, of inflation. This impact, however, is not immediate.