Brazil’s COPOM starts the year’s third meeting to set basic interest rates

RIO DE JANEIRO, Brazil – After raising interest rates for the first time in 6 years at its last meeting, the Central Bank’s Monetary Policy Committee (COPOM) is expected to repeat the decision at its 3rd meeting this year, when it sets the basic interest rate (SELIC).

The meeting starts today, May 4th, and ends tomorrow, May 5th, at which time COPOM will announce its decision.

With inflation rising over the last few months, financial institutions are expecting the SELIC to rise from 2.75% per year to 3.5%. The upward expectation is included in the Focus report, a survey released weekly by the Central Bank. By the end of 2021, the market projects the rate to stand at 5.5% per year.

From August 2020 to March this year, the SELIC stood at 2% a year, the lowest level since the beginning of the Central Bank’s official records, in 1986. The basic interest rate is used in the negotiation of government bonds issued by the National Treasury in the Special System for Settlement and Custody (SELIC) and serves as a reference for the other rates in the economy.

It is also the Central Bank’s main instrument to keep inflation under control. The Central Bank operates daily by means of open market operations – buying and selling federal government bonds – to keep the interest rate close to the value defined at the meeting.

When COPOM raises the basic interest rate, the purpose is to contain heated demand, and this has an impact on prices because higher interest rates render credit more expensive and encourage savings. However, banks consider other factors when it comes to defining the interest rates levied on consumers, such as default risk, profit, and administrative expenses.

By reducing the SELIC, the trend is that credit becomes cheaper, with an incentive to production and consumption, reducing inflation control and boosting economic activity. However, the interest rates for credit do not drop in the same proportion as the SELIC, because the latter is only a part of the cost of credit.

The COPOM meets every 45 days. On the first day of the meeting, technical presentations are made about the evolution and outlook for the Brazilian and world economies and the behavior of the financial market. On the second day, COPOM members, comprising the board of the Central Bank, analyze the possibilities and define the SELIC.

Inflation target

For 2021, the inflation target to be pursued by the Central Bank, defined by the National Monetary Council, is for 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 is 5.25%.

For 2022, the target is 3.5%, also with an interval of 1.5 percentage points up or down.

The analysts consulted in the Focus bulletin now project that official inflation, measured by the National Wide Consumer Price Index (IPCA), will close the year at 5.04%, close to the ceiling of the tolerance interval, driven by food, energy and fuel prices. For 2022, the estimate stands at 3.61%.

Source: Agencia Brasil

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