Selic rate in historical low: and the future?

03/28/2018

Prof. Dr. Pedro Raffy Vartanian


The March meeting of the Copom (Monetary Policy Committee of the Central Bank of Brazil) coincided on the same day that the Fed raised the interest rate. The Selic rate was reduced once again, to 6.5% per year, in new historic low. Selic began to be used as the basic interest rate of the economy to contain inflation after the implementation of the inflation targeting regime in 1999, although its origin dates back to the 1980s.

In the release of the press release from the meeting, and considering the prospective scenario in terms of low and controlled inflation, the Copom notes that, under current conditions, there is room for another cut. In other words, if the current scenario does not undergo changes of any nature, the Selic could be reduced again to 6.25%, when, finally, the cycle of the Selic would end.

Copom's optimistic view is justified by the behavior of prices and by the international scenario still favorable to emerging countries. In fact, the reduction of interest rates in Brazil to the lowest historical level on the same day that the US Central Bank decides to increase the interest rate is not something recurrent. History shows, and emphasizes the 1980s, that US contractionary monetary policy has severely impacted Latin America and other undeveloped nations, with a reversal of the flow of capital, falling commodity prices, and a series of moratoria and crises of debt.

The same optimistic statement also points out that the adverse scenario can occur at any time, altering the downward trend of the interest rate in Brazil with the reversal of monetary policy. The determinants for reversal are related to internal and external events. From the domestic point of view, the Brazilian economy has been gradually recovering after a long period of recession with the resumption of price stability and a partial, even rebalancing of the balance of payments. The fiscal question, however, suggests caution, in a scenario of high deficit and increasing debt-to-GDP ratio. As the past few months, and even years, have shown, fiscal adjustment on the expenditure side is significantly incipient at the same time that the correction of the deficit on the revenue side faces political difficulties in a country that has a fairly high tax burden terms.

From the international point of view, the fundamental concern is the economic environment, especially the reversal of expansionary monetary policies in the developed countries. History shows that a process of reversal of monetary policy in advanced countries, particularly the US, "absorbs" global liquidity. In other words, the reduction of liquidity due to the increase in the US interest rate causes a capital attraction for the largest economy in the world. These capitals, in turn, are allocated to securities and stocks of emerging countries. They are also allocated to risky investments in the US economy itself. The result is easily visible. The rise of the US interest rate tends to cause a fall in the US and the rest of the world stock market and a capital flight applied in bonds of the emerging countries, which causes a devaluation of the exchange rate and an increase of interest in countries such as Brazil.

In this context, it is practically impossible to risk a prediction about the continuity, or not, of the downward cycle of the Selic Rate. It is a fact that the risks in the internal and external environments suggest the interruption of the falls, with the Selic remaining in the current level in the next meetings. On the other hand, if the scenario remains extremely favorable, the Central Bank of Brazil will certainly not hesitate to reduce once again the basic interest rate of the economy until the total interruption of the downturn.

 

Pedro Raffy Vartanian is Coordinator of the Professional Master's Degree in Economics and Markets at Mackenzie Presbyterian University and researcher at the Mackenzie Center for Economic Freedom.