Central Bank cuts benchmark interest to surprising 6% a year

For the first time in one year and four months, Brazil’s Central Bank reduced the economy’s benchmark interest rate. The country’s Monetary Policy Committee (Copom), cut the Selic rate to six percent a year—down 0.5 percentage points. The decision surprised financial analysts, who were expecting a 0.25 decline.

The decision made at the Copom meeting Wednesday brings the Selic to the lowest level since the beginning of this time series, in 1986. The rate had been 6.5 percent since March 2018.

In a statement, Copom reiterates the need for strides in structural overhauls in the Brazilian economy so that interest can stay low for long. “Copom acknowledges that the process of reforms and necessary adjustments in the Brazilian economy has made progress, but it stresses that the continuity of this process is crucial for the reduction of the benchmark interest rate and the sustainable recovery of the economy,” the note reads.

The Central Bank signals that new reductions may be made in the coming months. “The committee believes that the consolidation of the benign scenario for prospective inflation should allow an additional adjustment in the degree of stimulus,” the text adds. The next Copom meeting is slated for September 18 and 19.

The benchmark interest rate is used in negotiations of public securities in the Special Clearance and Escrow System (Selic, in the original acronym), and serves as a parameter for other interest rates in the economy. It is the main tool the Central Bank can resort to to curb the official inflation, as measured by the National Broad Consumer Price Index, or IPCA. The indicator closed out June at 3.37 percent for the 12-month period. After several months on the rise, the index slowed down in the last few months. In June, the IPCA stood at 0.01 percent, the lower level for a a month since November 2018.

For 2019, the National Monetary Council (CMN) set the inflation target at 4.25 percent, plus or minus 1.5 percentage points. The IPCA, therefore, should not exceed 5.75 percent this year or stay below 2.75 percent. The target for 2020 was fixed at four percent, plus or minus 1.5 percentage points as well.