Interest decline

Institution cut basic interest by 1 percentage point. Fall is important to boost economy

For the eighth consecutive time, the Central Bank decided to cut the basic interest of the economy (Selic). On Wednesday (6), the monetary authority maintained the cut trajectory and reduced the rate from 9.25% a year to 8.25% a year, the lowest level for the Selic since May 2013.

Faced with the improvement of the Brazilian economy and the fall in inflation, the Central Bank's board unanimously decided to maintain the pace of cuts, by 1 percentage point per meeting. "The set of indicators of economic activity released since the last Copom meeting shows signs compatible with the gradual recovery of the Brazilian economy," the statement said after the meeting.

Group that gathers the directors of the Central Bank eight times a year to decide what will be the basic interest rate, the Selic, the  Copom is the acronym for Monetary Policy Committee. This year there will be even tougher meetings, one in October and one in December. 

In a statement issued after the ruling , the BC board said that the behavior of inflation remains quite favorable. The institution also evaluated, in this document, that the economic scenario calls for a "stimulating" monetary policy, with lower interest rates. 

For the Central Bank, reforms are essential for reducing the rate. "The Committee emphasizes that the process and reforms, such as the recent approval of measures in the credit area, and the necessary adjustments in the Brazilian economy contribute to the fall in its structural interest rate," the institution said in the statement.

Importance of Selic

The definition of the Selic rate is important for the economy as it is a reference for investments. Interest is considered to be the lowest rate of return for the cost of money. That is, when a business owner decides to take a project from paper, it assesses whether the project's profit is higher or lower than this base rate.

If Selic is lower than the expected rate of profit on the investment, it is more likely that the entrepreneur will keep those funds invested in some lower-risk financial investment.

Loans and financing

The basic interest rate also has a direct influence on how much a consumer pays for loans and financing. When the CB changes its value, it also changes the cost of banks to raise funds, money that will be subsequently loaned to customers.

If the cost of the bank rises, the loan to the consumer may also rise. If the rate goes down, this cost may go down. Basic interest rates are still of great importance because they help to control inflation. 

What is inflation target

In Brazil, for prices not to get out of control, a system of inflation targets was created. It works like this: the National Monetary Council (CMN), a body made up of state ministers, defines an objective to be pursued by the Central Bank. In 2017, the target is inflation at 4.5%.

This goal, however, allows room for potential crises and price shocks. That is, in exceptional situations, the IPCA can reach a maximum of 6% and a minimum of 3%.

 

Source: Portal Brasil, with information from the Central Bank