Index is the Central Bank’s main instrument for keeping inflation under control
The Monetary Policy Committee (Copom) of the Central Bank (BC) reduced the interest rate, to 14.5% per year this Wednesday (29), a drop of 0.25 percentage points compared to the previous level of 14.75%.
With the external environment still uncertain due to the lack of definition of when the geopolitical conflicts in the Middle East will end, there are impacts on global financial conditions.
“The Copom decided to reduce the basic interest rate to 14.50% pa, and understands that this decision is compatible with the strategy of inflation convergence around the target over the relevant horizon. Without prejudice to its fundamental objective of ensuring price stability, this decision also implies smoothing fluctuations in the level of economic activity and promoting full employment”, informed the Copom.
The committee that voted to reduce the rate also said that, due to the uncertainty, reaffirm the “serenity and caution in conducting monetary policy, so that future steps in the basic interest rate calibration process can incorporate new information that increases clarity about the depth and extent of conflicts in the Middle East.”
The expectation before the start of the war in Iran, which began on February 29, was that this 0.5 point reduction had already taken place in March. In the minutes of the January meeting, the Copom itself confirmed that it intended to start cutting the Selic in March. However, the beginning of the conflict between the United States, Israel and Iran questioned the size of the cutwith some financial institutions even betting on postponing the interest rate reduction, which happened now in April.
Selic Rate
The base interest rate is used in negotiations of public bonds issued by the National Treasury in the Special Settlement and Custody System (Selic) and serves as a reference for other rates in the economy. It is the Central Bank’s main instrument for keeping inflation under control.
The BC operates daily through open market operations – buying and selling federal public bonds – to keep the interest rate close to the value defined at the meeting.
When Copom raises the basic interest rate, it aims to contain heated demand, and this has an impact on prices because higher interest rates make credit more expensive and encourage savings.
In this way, rates of jHigher prices could also make it harder for the economy to expand. But, in addition to the Selic, banks consider other factors when defining the interest charged to consumers, such as risk of default, profit and administrative expenses.
When reducing the Selic, the tendency is for the credit becomes cheaper, with incentives for production and consumption, loosening inflation control and stimulating economic activity.
O Copom meets every 45 days. On the first day of the meeting, technical presentations are made on the evolution and prospects of the Brazilian and world economies and the behavior of the financial market. On the second day, the members of the Copom, formed by the BC board, analyze the possibilities and define the Selic.
*With information from Estadão Conteúdo
