Brazil's Central Bank Cuts Selic Rate to 4.5% a Year

By IndraStra Global News Team

By IndraStra Global News Team

Image Attribute: Banco Central do Brasil HQ Building in Brasilia, Brazil

On December 11, 2019, the Brazilian Central Bank (Banco Central do Brasil) lowered the economy’s benchmark interest rate — for the fourth consecutive time. Its committee unanimously decided to reduce the Selic rate to 4.5 percent a year, a 0.5 percentage point cut. The move had been expected by analysts.

The benchmark interest rate is used in the negotiation of bonds in the country’s Special Clearance and Escrow (Selic) system and provides a gauge for other interest rates in the economy. It is also the central bank’s main tool to curb official inflation (Broad Consumer Price Index, i.e., IPCA).*

The decision, made Wednesday (December 11), brings Selic to its lowest level since this time series was initiated by the Central Bank, in 1986.

In a statement, the bank’s Monetary Policy Committee, or Copom, said it will act cautiously and keep the rate at 4.5 percent a year for a long period, never failing to assess the economy’s conditions. The financial institution stressed the need to continue the structural reforms in the Brazilian economy so the rate may stay low for long.

The Selic's historic low comes as unemployment is slowly coming down, economists are raising their growth forecasts for this year and 2020, and the outlook is for inflation to remain under control.

Many economists nevertheless expect the central bank will keep the Selic on hold at its next meeting, on February 5 (2020), while watching out for price pressures such as a recent surge in meat prices caused by higher demand in China, a major importer of Brazilian food commodities.

In November, inflation stood at 0.51 percent, the highest figure for the month since 2015, driven by the hike in the dollar and in meat prices. In the 12-month period, the IPCA accumulated 3.27 percent but is still below the 4.25 percent target set for 2019. The 2020 target was set at four percent.

* The IPCA inflation released by the Instituto Brasileiro de Geografia e Estatistica is a measure of price movements by the comparison between the retail prices from consumption of families with a purchasing power of up to forty minimum wages. The purchasing power of the BRL is dragged down by inflation. The IPCA is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as positive (or bullish) for the BRL, while a low reading is seen as negative (or Bearish).