Economy

Copom reduces basic interest rate to 13.25% per year

This is the first time the Selic Rate has been reduced in three years

Wellton Máximo

Published on 03/08/2023 - 12:16

Agência Brasil – Brasília

Edifício-Sede do Banco Central em Brasília — © Marcello Casal JrAgência Brasil

Brazil's Central Bank has decided to cut interest rates for the first time in three years due to a significant drop in inflation. The Monetary Policy Committee (Copom) voted 5 to 4 in favor of reducing the Selic rate, the economy's basic interest rate, by 0.5 percentage points, bringing it down to 13.25 percent per year. This decision came as a surprise to the financial market, which had anticipated a smaller cut of 0.25 points.

A Copom's statement highlights that the decline in inflation has paved the way for this rate reduction. "The committee recognizes the improvement in the inflationary situation, partly driven by the delayed effects of a monetary policy, combined with decreased inflation expectations for the long-term following the National Monetary Council's recent decision on the inflation target. This accumulation of positive factors has instilled the necessary confidence to start a gradual cycle of monetary easing," the statement emphasized.

The last time the Central Bank cut the Selic rate was in August 2020, when it dropped from 2.25 to 2 percent per year. Subsequently, Copom raised the Selic rate 12 consecutive times in response to escalating food, energy, and fuel prices, maintaining it at 13.75 percent per year for seven consecutive times since August of last year.

Inflation

The Selic rate is a pivotal tool for the Central Bank to manage official inflation, measured by the Broad National Consumer Price Index (IPCA). In June, the indicator saw a negative growth of 0.08 percent and an accumulated rate of 3.16 percent over the past 12 months. In the last two months, the decline in inflation can be attributed to lower food and fuel prices.

The index closed last year above the ceiling of the inflation target. The National Monetary Council (CMN) set an inflation target of 3.25 percent for 2023, with a tolerance margin of 1.5 percentage points. Consequently, the IPCA should stay within the range of 1.75 to 4.75 percent this year.

While the Central Bank projected a 5 percent IPCA for 2023 in its Inflation Report released at the end of June, market forecasts indicate greater optimism. According to the Focus Bulletin, a weekly survey of financial institutions by the Central Bank, market estimates now predict a year-end inflation rate of 4.84 percent, an improvement from the previous estimate of 4.98 percent.

Implications and economic outlook

The reduction in the Selic rate is expected to stimulate the economy by making credit more accessible and affordable, thereby encouraging production and consumption. However, it may also pose challenges in terms of inflation control. In its last Inflation Report, the Central Bank projected a 2 percent economic growth for 2023, but market analysts are even more optimistic, projecting a 2.24 percent GDP expansion in the same year. This optimism was bolstered by the revelation that the Gross Domestic Product (GDP) grew by 1.9 percent in the first quarter.