Central Bank of Brazil Interest Rate Decision

The Selic rate is the basic interest rate of the Brazilian economy. The Monetary Policy Committee (COPOM) has the responsibility to set this rate. For this purpose, meetings take place eight times during the year. Virtually every interest calculation used by the market is based on the Selic rate, being the main reference of monetary policy by the Federal Government of Brazil. The Central Bank of Brazil (BCB) has the mission to maintain the Selic rate within the percentage established by the COPOM. Its main objective is to control the inflation, often having to intervene in the interbank market to achieve the established targets.

During the COPOM meetings, the perspectives for the Brazilian economy are discussed, such as: past and expected inflation, the country's economic growth, foreign exchange rate, foreign interest rate, level of credit activity, among other topics. In the light of these discussions, they decide on the ideal level of the country's interest rate — whether it should be raised, reduced, or maintained.

In practice, in the daily operations of the interbank market, the Selic rate is divided into two: Selic Meta and Selic Over.

The Selic Over rate represents the interbank market reality. Calculated on a daily basis, it is a weighted average of all financing operations in the Brazilian interbank market, which are backed by federal government securities and made in the Special System of Settlement and Custody (SELIC), in the form of repo operations. At the end of the day, the weighted average interest rate of the traded volumes for all interbank loans is calculated.

In order to fulfill its obligation to maintain the interest rate equilibrium, the Central Bank of Brazil operates in the primary and secondary markets, according to what the COPOM established as a target for the Selic rate. The primary market involves the purchase of government bonds by banks; the secondary involves the Central Bank itself in this market.

When the Central Bank verifies that Selic Over is distancing itself from Selic Meta, BCB buys or sells public bonds in the open market as required, so that the interest in the interbank market falls within the Selic rate target, regulating the liquidity of the economy according to the monetary policy.

Selic Meta serves as the basis for interbank transactions and the Selic Over rate comes from the need for financing between banks. By increasing the number of investors for financing, Selic Over declines. When there are more borrowers with bond portfolios, Selic Over increases. The Selic Over rate varies practically every day, and through the incursions of the Central Bank in the interbank market, it stays close to Selic Meta, maintaining the balance of the market.

The Selic rate may have influence:

• The variable income.
• In theory, the fall of the Selic rate favors the capital market, as it increases access to credit.
• Low rate interest indicates that the economy is in good shape.
• When the market slows down, the Selic rate tends to increase, with a tendency to decrease the consumption. As a result, the unemployment rate increases, among other bad consequences.
• In the medium term, variable income usually surpasses fixed income linked to the Selic rate.
• From the consumers’ perspective, the Selic rate has great weight in relation to loans, financing and financial investments.