Brazil's benchmark interest rate kept at 14.25% p.a.

For the sixth consecutive time, the Central Bank has decided to keep Brazil's key interest rate (SELIC) unchanged at 14.25% per annum. The decision had been anticipated by analysts, who expect it to remain at the current level throughout the year.

The SELIC rate has been at this level since the end of July. The rate is the main instrument the Central Bank uses for controlling inflationary pressures in Brazil. Financial market analysts have been lowering their forecasts for inflation for seven consecutive weeks. In addition to the ceased impact of the hike in regulated prices (such as energy and fuels), falling dollar rates have contributed to the inflation slowdown. This slowdown is expected to be even greater in the coming months because of the worsening of the economic crisis.

Although it helps curb price hikes, increasing the SELIC or keeping it at high levels can have other effects on the economy. This is because high interest rates lead to declines in production and consumption. Economic analysts forecast a 3.88% shrink in gross domestic product (GDP) in 2016, whereas the Central Bank's Inflation Report forecasts 3.5%.

Response

One of Brazil's main workers' unions, the Força Sindical, said maintaining the SELIC rate at 14.25% p.a. is “extremely perverse for workers.” According the union, this blocks economic development in the country. “The decision was a cold shower on an already stagnant economy. Once again, the government is bowing to [financial] speculation.”

“Insisting on maintaining high interest rates resulted in a 'pibinho' [small GDP] last year, reductions in production, demand, and income, and contributed toward the rise in unemployment, which reached 10.2%. All this scenario shows that workers are the ones paying the bill of the crisis,” Força Sindical said in a note.

The Federation of Trade in Goods, Services and Tourism of the State of São Paulo (FECOMERCIO) said that Brazil's political crisis has created so much uncertainty that it leaves no room for lowering interest. “Thus, the decision to maintain the SELIC rate cannot be regarded as too conservative in a scenario of declining economic activity and high inflation,” a note published by the federation read.

The Federation of Industries of the State of Rio de Janeiro (FIRJAN) was not surprised by the Central Bank's decision, since the Brazilian economy is facing its “deepest and longest-ever recession.” FIRJAN says that an interest decrease would depend on “tighter monetary and fiscal policy alignment” so that inflation stays within target and the economic picks up pace again.

In a statement, FIRJAN said it supports a “long-term fiscal plan that provides an anchor for economic players' expectations and can be implemented together with monetary policy.”

Translated by Mayra Borges