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Interest rates drop to 7.5% a year, lowest rate since April 2013

Economic resumption

Decision was released by the Central Bank early on Wednesday (25). Institution sees low inflation and resumption of growth

For the ninth consecutive time, the Central Bank decided to cut the basic interest of the economy (Selic). On Wednesday (25), the monetary authority maintained the trajectory of cuts and reduced the rate from 8.25% a year to 7.50% a year, the lowest level for the Selic since April 2013.

Faced with the improvement of the Brazilian economy and the fall in inflation, the Central Bank's board unanimously decided to cut 0.75 percentage points. Until then, the cuts were coming in at a stronger pace, by 1 point at each meeting.

This decision is taken in a group that gathers the directors of the Central Bank eight times a year to decide what the basic interest rate will be. The name of this group is Copom, which is the acronym for Monetary Policy Committee. 

In a statement issued after the decision, the BC board said that the behavior of inflation remains very favorable and that the Brazilian economy continues in a gradual recovery.

For the Central Bank, reforms are essential for reducing interest rates. "The Committee emphasizes that the process of reforms and adjustments required in the Brazilian economy contributes to the fall in its structural interest rate," the institution said in the statement.

Importance of Selic

The definition of the Selic rate is important for the economy as it is a reference for investments. Interest is considered to be the lowest rate of return for the cost of money. That is, when a business owner decides to take a project from paper, it assesses whether the project's profit is higher or lower than this base rate.

If the Selic is lower than the expected rate of profit on the investment, it is more likely that the entrepreneur will keep those funds invested in some lower-risk financial investment.

Loans and financing

The basic interest rate also has a direct influence on how much a consumer pays for loans and financing. When the BC changes the value of the rate, it also changes the cost of banks to raise funds, money that will be subsequently loaned to customers.

If the cost of the bank rises, the loan to the consumer may also rise. If the rate goes down, this cost may go down. Basic interest rates are still of great importance because they help to control inflation.

What is inflation target

In Brazil, for prices not to get out of control, a system of inflation targets was created. It works like this: the National Monetary Council (CMN), a body made up of state ministers, defines an objective to be pursued by the Central Bank. In 2017, the target is inflation at 4.5%.

This goal, however, allows room for potential crises and price shocks. That is, in exceptional situations, the IPCA can reach a maximum of 6% and a minimum of 3%.

Source: Portal Brasil, with information from the Central Bank