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By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – Brazilian Central Bank’s Comitê de Política Monetária – COPOM (Monetary Policy Committee) decided unanimously on Wednesday, March 4th, to increase the country’s benchmark interest rate (Selic) by 0.5 percentage points from 12.25 percent to 12.75 percent per year. The increase was in line with investors and market analysts’ forecasts. With the latest increase, the Selic returns to levels last seen in January 2009.

Workers' unions fear increase in unemployment with hike in Selic rate, Rio de Janeiro, Brazil News
Workers’ unions fear increase in unemployment with the hike in the Selic rate, photo by Marcelo Camargo/Agencia Brasil.

“Assessing the macroeconomic scenario and the perspectives for inflation, the COPOM decided, unanimously, to increase the Selic rate by 0.50 percentage points to 12.75 percent per year, without bias,” said the COPOM statement after the meeting.

With a galloping inflation, forecast are at 7.47 percent by the end of the year, and the strong devaluation of the Brazilian real, which hit a ten-year low on Wednesday, closing at R$2.98 per US$, analysts predict a very hard economic year for the country.

According to Enestor dos Santos, principal economist at BBVA Research, although the COPOM did not signal that Selic’s tightening cycle is close to an end, the increased weakness of the country’s economy and fears of entering a recession should guide the Central Bank in the coming months. “At this stage, we see as the most likely scenario a final 25bp adjustment in April,” said Santos in report published by BBVA on Thursday morning.

The increase of the Selic is one of the ways the Central Bank tries to reduce credit and consumption, to hold back inflation. On the other hand, high interest rates hinder the growth of the economy. According to the Focus Report released last week by the Central Bank, a survey conducted with a hundred financial institutions reveals that analysts believe that the Brazilian economy registered a zero growth last year and forecast a retraction in economic growth for 2015 of -0.58 percent.

consumer demand declines, Rio de Janeiro, Brazil News
Rising inflation has made consumers think twice before buying durable goods, such as household appliances, photo by Jose Cruz/ABr.

Representatives from trade and workers unions were quick to criticize the latest Central Bank decision, stating that increase in the benchmark interest rate could lead to further unemployment.

“The new increase in the benchmark interest rate is extremely negative for the country due to several reasons. First it will weaken the deteriorating economy even further, and threatens jobs,” said Carlos Cordeiro, president of Contraf-CUT (Confederation of Workers of the Financial Sector) in a statement.

Miguel Torres, president of Força Sindical, one of the country’s largest trade unions, stated in the entity’s webpage “the insensitive technocrats of the Central Bank lost a great opportunity to ease the noose which is choking the productive sector, which generates jobs and income.” Torres added that the decision is seen by society as a disappointment, “unfortunately once again the government has given in to speculators.”

According to CNI (National Confederation of Industries), “the increase of the benchmark interest rate will increase financing costs, discouraging corporate investments and inhibiting household consumption,” warns the entity, stating that with interest rates at this level the recovery of the economy will be more difficult.

According to the latest Focus Report, the forecast for the Selic at the end of 2015 is of thirteen percent per year.

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