Copom reduces Selic by 0.5 pp, taking the interest rate from 13.75% to 13.25%; What is the impact?

The federal government and the financial market were anxiously awaiting the rate reduction, which had not occurred since August 2020. This rate is fundamental as a reference for several other interest rates practiced in the market, influencing the costs of loans, financing, investments and even even in the profitability of financial investments.

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Copom members, at the first meeting between Galípolo and Aquino - Photo Reproduction/Raphael Ribeiro/BCB

The Monetary Policy Committee (Copom) of the Central Bank announced this Wednesday (2) a reduction in the Selic rate from 13.75% to 13.25% per annum. The decision was not unanimous among Copom members. This is the first time that the basic interest rate has been reduced in three years. The last drop occurred in August 2020, during the peak of the Covid-19 pandemic, when the Selic rate was reduced from 2.5% to 2% per year. Since then, the rate has shown gradual increases, reaching 13.75% in August 2022.

Decision

Amidst persistent criticism from President Luiz Inácio Lula da Silva (PT) and members of the federal government regarding the current Selic rate, the Monetary Policy Committee (Copom) made its decision. According to the assessment, the index has exerted a chilling influence on economic growth. On the other hand, the president of the Central Bank, Roberto Campos Neto, defended the importance of maintaining the rate to control inflation. It is relevant to note that Campos Neto holds autonomy in his position, which means that he cannot be fired by Lula.

Wishes

According to the statement released by the Copom, there were five directors who voted in favor of the 0.5 cut percentage point and four who voted in favor of a reduction of 0.25. Among those who voted in favor of the 0.5 percentage point reduction were President Roberto Campos Neto, Ailton de Aquino Santos, Carolina de Assis Barros, Gabriel Galípolo and Otávio Ribeiro Damaso. In turn, those who opted to cut the Selic rate to 13.50% were Diogo Abry Guillen, Fernanda Magalhães Rumenos Guardado, Maurício Costa de Moura and Renato Dias de Brito Gomes.

What is SELIC?

A Selic is the basic interest rate of the Brazilian economy and is defined by the Copom, which meets every 45 days to assess the economic scenario and decide on policy directions for the currency of the country. This rate serves as a reference for several other interest rates practiced in the market, influencing, for example, the costs of loans, financing, investments and even the profitability of financial investments.

When the inflation rate is at high levels, the Central Bank (BC) chooses to increase the basic interest rate, known as Selic. In contrast, if the inflation estimates are in line with the established target, the BC may decide to reduce the Selic rate. For the year 2023, the inflation target was set at 3.25%, being considered formally reached if it is between 1.75% and 4.75%. The inflation target for the subsequent year is 3%, and will be considered achieved if it fluctuates between 1.5% and 4.5%.

Impact of Selic reduction

1. Stimulus to consumption and investment: The Selic reduction makes credit cheaper, which stimulates consumption and productive investments. With lower interest rates, individuals and businesses have greater access to loans and financing, which can boost demand for goods and services and spur economic growth.

2. Incentive to the real estate market: With the decrease in interest rates, real estate financing tends to become more accessible, boosting the civil construction sector and making the purchase of real estate more attractive for consumers.

3. Challenges for savings: The Selic reduction can negatively impact the profitability of savings, which is directly linked to the interest rate. Investors who have their resources invested in savings can seek other investment alternatives to obtain more attractive returns.

4. Inflation control: Although the Selic reduction stimulates the economy, the Copom also needs to be alert so that the measure does not trigger inflationary pressures. If there is an acceleration of inflation, the committee may choose to reverse the scenario and increase the interest rate again.

5. Impact on public accounts: The reduction in the basic interest rate may also affect the public accounts, since the costs of rolling over the public debt tend to decrease. However, it is important to consider that the Company's decision is based on several economic variables, and the government's fiscal policy also plays an important role in the public accounts.

Copom meetings

The Monetary Policy Committee (Copom) comprises the president of the Central Bank and eight directors of the institution. This meeting marked the first time that the committee operated with its new formation, after the Senate approved the nominations of Gabriel Galípolo and Ailton Aquino for the directorship of the Central Bank. Both had been nominated by former President Lula. The Copom has the habit of meeting every 45 days to determine the level of the Selic rate. The committee still has plans to meet on three more occasions this year: between September 19th and 20th, October 31st and November 1st, and December 12th and 13th.