The Monetary Policy Committee (Cup) raised the interest rate target Selic by 1 percentage point (pp), from 4.25% to 5.25% per year, in a decision this Wednesday, 4.
This was the fourth interest rate hike since March, when the rate was still at 2% a year. At the last meeting, held in June, the collegiate had raised the Selic by 0.75 pp, leaving open the possibility of a new increase of the same magnitude or greater, depending on market conditions.
With the 12-month IPCA above 8% and inflation expectations above the mid-point target for 2022, option was a tougher move, in line with market expectations. “The strategy of being more timely in the adjustment of monetary policy is the most appropriate to guarantee the anchoring of inflation expectations,” stated the Copom in a statement.
The statement still classifies consumer inflation as “persistent” and that the latest indicators show a more “unfavorable” composition. “The surprise with (…) services inflation and the continued pressure on industrial goods stand out. The Committee also cites the rise in food prices and the energy bill as “factors [que] entail a significant revision of short-term projections.”
The basic interest rate is used in trading public securities issued by the National Treasury in the Special System for Settlement and Custody (Selic) and serves as a reference for the other rates of the economy. It is also the central bank’s main instrument to keep inflation under control. The BC operates daily through open market operations – buying and selling federal government bonds – to maintain the interest rate close to the value defined at the meeting.
When the Copom increases the basic interest rate, the purpose is to contain the heated demand, and this causes reflexes on prices because the higher interest rates make credit more expensive and stimulate savings. In this way, higher rates can curb economic activity. By reducing the Selic, the trend is for credit to become cheaper, with incentives for production and consumption, reducing inflation control and stimulating economic activity.
However, credit interest rates do not vary in the same proportion as Selic, as Selic is only a part of the cost of credit. Banks also consider other factors when defining the interest charged to consumers, such as risk of default, profit and administrative expenses.
The Copom meets every 45 days. On the first day of the meeting, technical presentations are made on the evolution and perspectives of the Brazilian and world economies and the behavior of the financial market. On the second day, the members of the Copom, formed by the BC board, analyze the possibilities and define the Selic.
Following guidance from BC’s people management area, last week all Copom members were tested for covid-19. Director Bruno Serra tested positive and, therefore, will not participate in the in-person sessions this Tuesday and Wednesday. “The director remains asymptomatic and normally performs his functions remotely,” informed the BC.
For 2021, the goal of inflation which should be pursued by the BC, defined by the National Monetary Council, is 3.75% for this year, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 2.25% and the upper limit is 5.25%.
In the last Inflation Report, released at the end of June by the Central Bank, the monetary authority estimated that, in 2021, the Extended National Consumer Price Index (IPCA), which is the country’s official inflation, would close the year at 5, 82% in the base scenario, with Selic at 6.25% per year and exchange starting at R$ 5.05.
The market forecasts an even higher inflation, closing the year at 6.79%, according to the latest Focus bulletin. It is the 17th consecutive increase in the forecast of financial institutions.
In June, inflation slowed to 0.53%, after reaching 0.83% in May. Even so, with the result, the IPCA accumulates high of 3.77% in the year, and 8.35% in the last 12 months.
July data should be released by the Brazilian Institute of Geography and Statistics (IBGE) next week, but the Extended National Consumer Price Index – 15 (IPCA-15), which measures the preview of official inflation, registered inflation of 0 0.72% last month, the biggest change in the IPCA-15 for a month of July since 2004 (0.93%).
(With information from Agência Brasil)
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