By Lisa Flueckiger, Senior Contributing Reporter
RIO DE JANEIRO, BRAZIL – Brazil’s benchmark interest rate, the Selic, has been increased for the seventh time in a row by the Central Bank’s Monetary Policy Committee, COPOM. This time, another 0.5 percent were added to the rate, which now reaches 14.25 percent, a level last seen in October 2006.
The Selic interest rate is the Central Bank’s main interest to curb inflation, which according to latest forecasts is set to be well above nine percent at the end of the year. The inflation target had initially been set at 4.5 percent with a possible variation of two percentage points.
In the last COPOM meeting in June this year, the Selic had already been increased by 0.5 percent and stood at 13.75 percent, as inflation forecasts had already been above the target.
The Committee justified the latest increase, stating that “the committee understands that maintaining this level of the basic interest rate, for a sufficiently long period, is necessary for a convergence of inflation to the target [set for] the end of 2016.”
Inflation is currently pushed mainly by high food and electricity and fuel prices. Yet, even though the increased Selic rate helps to control prices, it also hurts the economy by adversely affecting production and consumption. This in a year, where experts estimate the GDP to contract by 1.76 percent.
The Selic is officially used in the “Sistema Especial de Liquidação e Custódia” (Special Clearance and Escrow System) and banks’ overnight rate. But it also serves as a baseline of other interest rates in the Brazilian economy. By increasing the rate, demand pressuring prices is curbed as credit is more expensive and saving is encouraged.