Key interest rate increased to 11.25% p.a.

The Central Bank (BC) has adjusted Brazil's key interest rate, the SELIC, for the first time in the past six months. By 5 votes to 3, the Monetary Policy Committee (COPOM) decided to raise it to 11.25% per annum, its highest level since November 2011 (11.5%).

Since December 2011, the SELIC rate had been subsequently reduced reaching a record low of 7.25% in October 2012, which was maintained stable until April 2013. At that point, a new upward cycle was initiated as an effort to contain inflationary pressures, only to regain stability in April 2014 at 11%.

The rate is the bank's main tool to keep inflation within the official target range set by the economics panel. Adjustments are designed to contain excessive demand by making credit more expensive and driving up savings, so as to control inflationary pressures. On the other hand, an adjustment could have an adverse effect on the current economic upward trend which yielded 2.5% growth last year and is still reliant on government stimuli including exemptions and cheap credit. Economic analysts expect the Gross Domestic Product (GDP) to have grown as little as 0.27% by the end of 2014, as opposed to an official government projection of 0.9%.

In a statement, the Central Bank said an adjustment was required to ensure a more “benign” inflation scenario for 2015 and 2016, since rising relative prices have led to growing inflation concerns.

The increase in interest came as a surprise for the manufacturing sector. The National Confederation of Industry (CNI) urged cuts in public spending to avoid new increases, arguing this would allow for more control over inflation and help reduce interest in a sustained way.

“Our country's challenge is now to create the conditions for a sustained reduction in interest rates. A strict fiscal policy is critical to reverse inflationary expectations and make the upward interest trend as short as possible,” the CNI said in a statement.

Translated by Mayra Borges