Central Bank cuts interest rate to lowest level since 2013

For the sixth consecutive time, the Central Bank has decided to cut Brazil's benchmark interest rate (the Selic). After meeting this Wednesday (31), the Central Bank's Monetary Policy Committee (Copom) maintained its current cycle and cut the rate from 11.25% to 10.25% p.a., the lowest level for the Selic since November 2013.

In a unanimous decision, the BC board opted to continue the pace of cuts in light of the improvements seen in the Brazilian economy. At the previous meeting, the adjustment had also been of one percentage point.

In a statement published after the decision, the BC board said that the scenario remains in line with the stabilisation of the Brazilian economy in the short term and its gradual recovery throughout the year. "Inflation continues to show favourable behaviour, with widespread disinflation even in the components most sensitive to the economic cycle and monetary policy", said the Central Bank.

The institution explained further that, even with the recent uncertainties, the scenario of inflation around the 4.5% target pursued by the Central Bank is compatible with the process of monetary easing (interest cuts).

The importance of Selic

The definition of the benchmark rate is important for the economy because it is a reference for investments. The Selic is considered to be the lowest rate of return for the cost of money. In other words, when a business owner decides to get a project going, it evaluates whether the project's profit is higher or lower than this base rate.

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

Loans and financing

The basic interest rate also has a direct influence on how much consumers pay for loans and financing. When the Central Bank changes the rate, it also changes the costs banks incur to raise money, which may later reflect in the costs of money borrowed from customers.

If the banks' costs rise, loans to consumers can also become more expensive. If the rate goes down, costs may go down. Basic interest rates are also crucially important because they help control inflation.

What is the inflation target?

Brazil has implemented an inflation target regime to prevent prices from getting out of control. It works like this: The National Monetary Council (CMN), a collegiate body comprising several cabinet members, defines a target to be pursued by the Central Bank. In 2017, the target for inflation is 4.5%.

This target, however, has some room to accommodate potential crises and price shocks. In exceptional situations, the IPCA (Broad Consumer Price Index, Brazil's reference inflation rate) can vary by 1.5% in either direction - i.e. from a high of 6% to a low of 3%.