The basic interest rate is the Central Bank’s main tool to control inflation and has a direct influence on household consumption and investments
A Selic is the basic interest rate of the Brazilian economy. Interest is used by central bank as a tool to try to control the inflation, as the rise or fall of interest rates influences household consumption and borrowing in the country. In general, when inflation is high, the BC raises interest rates to reduce consumption and force prices to fall. When inflation is low, the BC lowers interest rates to stimulate consumption. Selic influences all interest rates in the country, such as loans, financing and financial investments. When the BC changes the Selic target to low, the profitability of the bonds linked to it falls and, with that, the cost of banks also decreases. Thus, a reduction in the Selic, for example, should also make the interest charged by financial institutions on loans fall. The opposite occurs when the Selic rises: the cost of banks increases and they start charging more for loans.
The acronym comes from the Special System for Settlement and Custody, which is the BC’s reference for daily transactions involving the issuance, sale and purchase of government bonds. These, in turn, are one of the ways the government raises money to maintain the country — whether to build more roads and hospitals or invest in security — in addition to raising taxes. The Selic rate is decided by the Monetary Police Committee (Copom) every 45 days, and is influenced by issues such as inflation, recession risk and economic growth prospects. Ease of access to bank credit and financing is one of the main effects of Selic on Brazilians’ pockets. As it serves as the basis for interest rates across the country, the lower the Selic, the lower the interest rates imposed by financial institutions tend to be. According to the Focus Bulletin, the weekly report released by BC with the opinion of analysts and financial consultants on the direction of the economy, the Selic should close 2021 at 6.79% per year.