By Ben Tavener, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – The Brazilian government has made changes to the way in which the annual rate of interest is calculated on new deposits to the country’s national savings program. Analysts are explaining the move as a way for Brazil to reduce its benchmark interest rate, the SELIC, to fall in line with comparable economies around the world.

Finance Minister Guido Mantega Brazil News
Guido Mantega says, despite the new rules, the savings accounts remain a "great investment for Brazilians," photo by Fábio Rodrigues Pozzebom/ABr.

Brazil’s Finance Minister Guido Mantega said the changes made were “minimal,” and that the SELIC would only fall if inflation were completely under control.

“There has been no break in the contract, [and] the saving accounts continue to be a great investment for Brazilians,” he said, outlining the new rules in Brasília last week.

Under the new rules, if the SELIC dips to 8.5 percent or less, the plan will give interest at seventy percent of the SELIC plus a reference rate, the TR. Before the change, the savings program currently had been at a fixed rate of at least 0.5 percent interest per month (6.17 percent annually).

The change only affects new deposits made on or after May 4th, 2012. But analysts say this is the government’s clearest signal yet to the Central Bank that the SELIC, which currently stands at nine percent, can be reduced further, despite the interest rate being very near the historic low of 8.75 percent.

However, experts say the SELIC could soon be on the slide, and could happen as soon as the end of May when Copom, Brazil’s Monetary Policy Committee, next convenes.

If, as many believe is likely, the SELIC drops to 8.5 percentage points, savers investing R$10,000 would earn only R$582.91 of interest (plus the TR) annually, instead of R$616.78 with the previous fixed rate, which guaranteed at least 0.5 percent per month.

Theoretically, if the SELIC were to drop to eight percent, the rate of interest would be 5.6 percent plus the TR. At seven percent, savers would earn just 4.9 percent plus the TR.

Brazil’s nine percent interest rate is high – particularly when compared to countries such as the U.S., where the interest rate is reported at 0.25 percent. The Euro-zone rate currently stands at one percent, and in the UK it is 0.5 percent – and it is no secret that the government wants to shake off the label as “highest real interest rate in the world.”

SELIC rate for the past twelve months, Brazil News
This graph shows how the SELIC, Brazil's key interest rate, has been steadily reduced over the past twelve months.

“Ultimately, reducing the SELIC would mean lower interest rates for bank loans to individuals and corporations, and also huge savings for the treasury. On the other side, the national savings [plan] rate always guaranteed a minimum return for investors, and has been historically seen as a ´safe harbor´ for investors,” financial adviser Howard Borsden of Looking for Dylan explains to The Rio Times.

“Tying the rate to the SELIC makes plenty of room for the government to lower the latter without running the risk of lack of funding, as investors will not be attracted by the savings [plan] as a better option,” Mr. Borsden continues.

Banks have recently been cutting their rates following the Central Bank’s recent moves to cut the SELIC, which it can amend every 45 days.

Our expert does not recommend the national savings plan as an opinion for foreign investors, as they “do not provide investors with a significant money pay back guarantee, nor protection or benefits to beneficiaries on succession,” adding that there are more “sophisticated tools for investors who want to benefit of the Brazilian growth responsibly,” with additional options better suited for a scenario where inflation increases again.

According to Brazil’s Ministry of Finance, there are currently 100 million savings accounts – known as “cadernetas de poupança” – in Brazil, tantamount to some R$430 billion (around US$223 billion).


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