Selic drop shows the Brazilian economy has resumed growth

Essential to determining consumption behaviour, credit supply and price adjustment, the Selic, Brazil's benchmark interest rate, was one of the great highlights of the economy this year. From a high of 14.25% p.a. during much of 2016, the rate today is at 7.5% p.a.. The drop is a direct result of the shift in economic policy, which has been reorganised and now follows responsible economic fundamentals.

This rate directly affects the lives of Brazilians, since the lower it is, the better for the population and the country. In practice, families will benefit from lower interest rates on loans and financing. Companies, in turn, will have less costs to operate, and thus have more resources to hire more.

The fall in the interest rates fits into what economists call a "virtuous circle," i.e. a sustainable and positive trajectory for the Brazilian economy. However, this reduction was only possible after the conditions for it were built: in recent months, important reforms were enacted, such as the creation of the government spending ceiling, actions to facilitate credit and other measures that reorganised the economy.

How is the rate defined?

The Selic rate is established by the Central Bank, whose institutional mission is to ensure Brazil's financial stability by controlling inflation.

Every 45 days, the Central Bank board, known as the Monetary Policy Committee (Copom), meets to evaluate the economic scenario and set the level of the Selic rate for the next period.

Why is it so important?

Because it is used as a reference for all transactions between banks, the Selic influences the entire Brazilian economy. Copom meetings are closely monitored by all economic agents - from economists to investors.

When it rises, access to credit by the population becomes more difficult, resulting in decreased consumption. If the rate falls, the opposite occurs.

How does it control inflation?

Since the Selic influences consumption by acting on the supply of credit, it is the main tool used to keep prices under control. Less access to credit makes money scarcer, causing the population to avoid spending, which drives down prices.

More access to credit means the opposite: people become more confident, consume more, and consequently heat up the economy. Since prices are falling despite the fall in interest rates, the Central Bank has more room to cut, which has positive effects on economic activity.

How so?

An increase in the Selic rate increases the attractiveness of investing in public debt bonds, so the tendency is for people to choose to direct their money to investments in bonds secured by the Brazilian government, since they are safe and the rate of return is higher.

When the opposite occurs, investments in the productive sector become more viable, which benefits the economy during periods of weak growth.