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Interest rates fall to 7% per year, the lowest rate since 1986

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Reduction is a milestone for the country's history, which has come to face uncontrolled price hikes in the 1990s. Low interest scenario is solid and has been constructed responsibly

Faced with the improvement of the Brazilian economy and the fall in inflation, the Central Bank's board unanimously decided to cut interest rates for the tenth consecutive time. The rate has now dropped to 7% a year - the lowest level since 1986, when the CB started to set that rate. For Brazilians, this means more jobs, more growth and cheaper credit.

This new scenario, with lower interest rates, was only possible after measures that created conditions for lower rates. The spending ceiling, the fiscal adjustment and other measures that reorganized the economy gave the space that the Central Bank needed to make these cuts.

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 ruling, the BC board said that the behavior of inflation "has evolved as expected."

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