Copom reduces Selic rate to 2.25% per year

The Central Bank (BC) decreased, for the eighth consecutive time, the basic interest rates of the economy. Unanimously, the Monetary Policy Committee (Copom) reduced the Selic rate to 2.25% per year, with a cut of 0.75 percentage points. The decision was expected by financial analysts. According to this week's FOCUS survey, most economic agents were expecting a reduction in basic interest rates to 2.25%. In a statement, the BC said that the reduction in interest decided at the last meetings is compatible with the economic impacts of the pandemic of the new coronavirus and that, for the next meetings, there may be a "residual adjustment" in monetary stimulus. However, the maintenance of the rate at reduced levels in the medium term will depend on the trajectory of government spending next year, given the high investments in resources to contain the effects of the pandemic. "Copom understands that, at this moment, the economic situation continues to prescribe extraordinarily high monetary stimulus, but recognizes that the remaining space for monetary policy use is uncertain and should be small. The committee assesses that the fiscal trajectory over the next year, as well as the perception of its sustainability, are decisive in determining the prolongation of the stimulus," bc said in a press release. With the decision of Wednesday (17), Selic is at the lowest level since the beginning of the historical series of the Central Bank in 1986. From October 2012 to April 2013, the rate was maintained at 7.25% per year and gradually adjusted to 14.25% per year in July 2015. In October 2016, Copom again reduced the economy's basic interest rates until the rate reached 6.5% per year in March 2018, only to be reduced again in July 2019. Selic is the Central Bank's main instrument for keeping official inflation under control, as measured by the Broad National Consumer Price Index (IPCA). In the 12 months ended in March, the indicator closed at 3.3%, the lowest accumulated result in 12 months since October last year. Inflation, which had risen at the end of last year because of the rise in meat and the dollar, is now expected to fall more than expected because of production and consumption interruptions caused by the covid-19 pandemic. For 2020, the National Monetary Council (CMN) set an inflation target of 4%, with a tolerance margin of 1.5 percentage points. The IPCA, therefore, will not be able to exceed 5.5% this year or fall below 2.5%. The target for 2021 was set at 3.75%, also with a tolerance interval of 1.5 percentage points. In the Inflation Report released at the end of March by the Central Bank, the monetary authority estimated that the IPCA would close the year at 2.6%. The projection, however, was out dated in the face of the covid-19 pandemic. According to the Focus newsletter, a weekly survey of financial institutions released by bc, official inflation is expected to close the year at 1.97%, but estimates are expected to continue to fall in the coming surveys. The reduction of the Selic rate stimulates the economy because lower interest rates cheapen credit and encourage production and consumption in a scenario of low economic activity. In the latest Inflation Report, bc projected zero growth for the economy this year. However, the prediction had been made before the worsening of the crisis caused by coronavirus. The basic interest rate is used in the trading of public securities in the Special System of Settlement and Custody (Selic) and serves as a reference for the other interest rates of the economy. By adjusting it upwards, the Central Bank handles the excess demand that puts pressure on prices, because higher interest rates increase credit and stimulate savings. By reducing basic interest rates, Copom cheapens credit and encourages production and consumption, but weakens inflation control. To cut Selic, the monetary authority needs to be sure that prices are under control and are not in danger of rising.