Following an increase in the inflation rate* on food items, fuels, and energy, Brazil’s Central Bank has tightened up its monetary policy, by increasing the country’s benchmark interest rate, known as the Selic, from 5.25 to 6.25 per cent a year.The rate is at its highest since July 2019, when it reached 6.5 per cent a year. This was the fifth consecutive adjustment made to the Selic.
The benchmark interest rate is used in negotiations of public bonds and serves as a parameter for other interest rates in the country. Consumer interest rates are higher than the Selic base rate but it is used as a reference for other interest rates. In Brazil, the Selic is the Central Bank’s main tool for keeping the official inflation rate* under control. Reducing the Selic rate stimulates the economy, as lower interest rates make borrowing money cheaper and this encourages production and consumption when the economy is slow.
The National Broad Consumer Price Index, or IPCA, which measures inflation, reached at the end of August the highest level for the month since 2000, with an accumulated rate of 9.68 per cent for the 12-month period. The rise was largely pushed by the dollar as well as increases in the price of fuel and electricity. The amount is above the target set for inflation by the National Monetary Council. For 2021, the target stands at 3.75 per cent, with a tolerance margin of 1.5 percentage points either way.
*Central Bank: an institution that manages a state’s currency, money supply, and interest rates.
*benchmark: a standard or point of reference against which things may be compared or assessed.
*interest rate: is the percentage charged by the lender for the use of his or her money. In simplified terms, when you invest money the bank pays you an interest rate, a benefit for leaving the money in the bank, and when you borrow money, you pay the bank interest, a price for using someone else’s money.
*inflation rate: the rate at which the general level of prices for goods and services is rising and, consequently, the buying power of currency is falling.