On March 17, 2021, Banco Central increased the discount rate (SELIC) by 0.75%, taking it from 2 to 2.75% per annum.
This is the first increase after about six years of decreases: on 29 July 2015, at the height of the economic crisis during the government of Dilma (PT) it had even reached 14.25%, in an attempt (later successful) to contain inflation galloping.
The decision of the Monetary Policy Committee (COPOM) was taken unanimously, but not without a long internal discussion. The press release issued at the end of the meeting also revealed that during the next meeting, to be held in April, the discount rate will be increased by a further 0.75%.
In mid-April, therefore, we will have a SELIC at 3.50% per annum.
Why this increase, just on the day when the US Fed instead announced that it will keep the interest rate at historic lows?
In recent months, inflation has accelerated: the IPCA index (consumer prices) in February marked a +5.2%, while the IGPM index (wholesale prices) a +28.9%.
Banco Central’s inflation target for 2021 is + 3.75%, with a tolerance interval between + 2.25% and + 5.25%.
The intervention of Banco Central (the first after the proclamation of its autonomy, which took place in February 2021) comes at a time of growing fiscal deficit and therefore obliges – in a certain sense – government and parliament to make a greater effort to contain expenses, as the cost of public debt becomes higher.
Recall the role of Banco Central is to ensure the stability of prices and the value of the Brazilian currency, the real, and the control and maintenance of the stability and efficiency of the financial system.
What are the immediate consequences of the increase in SELIC?
With a higher discount rate, the attractiveness of Brazilian debt securities increases, which will attract foreign investors and therefore a flow of hard currency to Brazil. The real should therefore, at least in the short term, appreciate against the dollar and the euro.
Similarly, there should be a shift from variable-income investments (stocks, real estate funds, ETFs, etc.) to fixed-income ones (government bonds, certificates of deposit, debentures, etc.). It is necessary to see to what extent the market has “priced” (ie incorporated into future prices) this substantial increase in SELIC.
With regard to the real economy, the increase in the cost of money will cause a slowdown in investments (in the production and real estate sectors) and in the consumption of durable and semi-durable goods.
It is certainly not the best medicine at a time of still very weak economic recovery, but the loss of control of the value of the currency would certainly have even more serious consequences, especially for the poorest families who do not have access to financial instruments that protect them from inflation.
On March 18, the day after the rise of the SELIC, the Bovespa index lost 1.47%; the real appreciated by 0.3% against the dollar and 0.82% against the euro.