The Power of the Selic Rate How It Shapes Finance in Brazil

The Selic rate is an expression that permeates conversations about the economy, finance and investments in Brazil. If you are interested in these topics, it is essential to understand the Selic rate in detail and understand how its fluctuations impact the Brazilian economy and, consequently, your pocket.

What is the Selic Rate?

The Selic rate is the basic interest rate of the Brazilian economy. It is so named because of the Special Settlement and Custody System, a mechanism for trading federal government bonds administered by the Central Bank of Brazil. This rate represents the interest charged or paid on loans, financing and investments in the country.

How Does the Selic Rate Influence Interest Rates in Brazil?

The Selic rate plays a crucial role in the Brazilian financial system. It is the parameter that defines the cost of money, directly affecting all interest rates practiced in the country. To better understand how this works, imagine that the Selic rate is the “price” of money.

• Loans and Financing: When the Selic rate is high, interest rates rise, making loans and financing more expensive for both individuals and companies. On the other hand, when the Selic rate is reduced, the cost of credit falls, encouraging consumption and investment.
• Fixed Income Investments: The Selic rate has a direct impact on fixed-income investments, such as Bank Deposit Certificates (CDBs), government bonds and Letters of Credit. In times of high Selic, these investments tend to offer more attractive returns. In times of low Selic, the profitability of these assets is reduced.
• Consumption: The relationship between the Selic rate and consumption is clear. High interest rates discourage people from taking out loans and financing, since the cost of the installments becomes higher. This can lead to a slowdown in the consumption of goods and services. When the Selic rate is reduced, the scenario is reversed, and consumption tends to increase.
• Variable Income: Although variable income is not directly affected by the Selic rate, it is indirectly influenced. A low Selic rate can stimulate the growth of companies, leading to better financial results and, consequently, an increase in the value of shares. On the other hand, a high Selic rate can harm economic activity and negatively impact shares.

The Importance of the Selic Rate in Monetary Policy

The Selic rate plays a central role in Brazil's monetary policy strategy. This strategy, based on the inflation targeting system, was created in 1999 to keep inflation within limits set by the National Monetary Council (CMN).

Initially, the inflation target was 8%, with a tolerance range of two percentage points up or down. Over time, this target was reduced and remained at 4.5% per year for almost 15 years. In 2020, the target was 4%, with a tolerance range of 1.5 percentage points up or down.

The main instrument used to achieve these inflation targets is the Selic rate. When the economy is booming and prices start to rise, threatening to exceed the inflation target, the Central Bank increases the Selic rate. With higher interest rates, taking out loans and financing becomes more expensive, which discourages consumption and helps control prices.

On the other hand, when inflation is under control or below the target, the Central Bank can reduce the Selic rate, stimulating consumption and boosting the economy. Therefore, the Selic rate is a fundamental tool for maintaining economic stability and avoiding price spirals.

When and How is the Selic Rate Defined?

The “target” Selic rate is established and announced by the Monetary Policy Committee (Copom), a body of the Central Bank composed of the president of the Central Bank and directors. This rate is the target that the Central Bank seeks for the “effective” Selic rate, which is the average rate of transactions carried out in the very short-term interbank market.

Copom meets every 45 days to decide on the Selic rate that will be in effect for the coming months. The meetings follow a set schedule and generally last two days. During these meetings, the outlook for the Brazilian and global economies is analyzed, as well as liquidity conditions and market behavior.

The Copom’s decision is announced on the same day as the meeting in a press release. The minutes of the meeting, detailing the reasons behind the decision, are published six business days later. This transparency in communication is important to align public expectations regarding monetary policy and maintain confidence in the inflation targeting system.

Selic Over and Selic Meta – What’s the Difference?

The Selic Target Rate is the one determined by Copom and serves as a guide for monetary policy. It is currently at 13.25% per year. On the other hand, the Selic Over Rate represents the average rate for very short-term interbank transactions, with maturity in one day. These transactions involve federal government bonds as collateral.

The Selic Over is the result of daily transactions between financial institutions that need short-term funds to meet their financial obligations and those that have surplus funds. These transactions take place on the open market, where banks exchange money among themselves.

The Selic Over rate tends to be close to the Selic Target rate, but it may vary, especially on days close to the maturity of government bonds. The difference between these two rates is small and, in practice, the Selic Target rate is the value that the market seeks to achieve.

The Impact of the Selic Rate on Fixed Income

If you are an investor or are thinking about starting to invest, the Selic Rate is one of the main indicators to consider, especially when it comes to fixed income investments.

• CDBs and Private Securities: Bank Deposit Certificates (CDBs) and other private fixed-income securities usually offer returns tied to the Selic rate. When the Selic rate rises, these investments become more attractive, as they offer higher returns. However, when the Selic rate falls, the profitability of these assets is reduced.
• Public Securities: Federal government bonds, such as the Tesouro Selic, are also influenced by the Selic rate. The Tesouro Selic, for example, closely follows the variations in the Selic rate and is a safe option for conservative investors. When the Selic rate rises, the yields on the Tesouro Selic increase.
• Letters of Credit: Letters of Credit, such as LCA and LCI, generally offer returns above the Selic Rate. However, these investments can also be affected by movements in the Selic Rate, especially in relation to offers made by financial institutions.

Effects of the Selic Rate on the Economy and Consumption

The Selic rate not only affects investors and borrowers, but also the economy as a whole.

• Inflation: The Central Bank uses the Selic rate as a tool to control inflation. When prices rise too much, the Central Bank increases the Selic rate to reduce consumption and investment, curbing demand and, consequently, prices.
• Economic Growth: Lower interest rates, resulting from a reduced Selic rate, tend to stimulate economic growth. With lower financing costs, companies invest more in production and hiring, while consumers spend more.
• Unemployment: The unemployment rate can also be influenced by the Selic rate. Lower interest rates can stimulate economic growth and, consequently, job creation. However, other economic factors also play an important role in the labor market.

The Selic Cycle and Market Expectations

The Selic cycle refers to the upward and downward movement of this rate over time. It is important to note that Copom's decisions do not have an immediate impact on the economy, taking time to be fully reflected.

For example, if Copom decides to raise the Selic rate at a meeting, it takes some time for this to influence the real interest rates that consumers and companies face. Financial institutions need to adjust their lending and investment rates, and this process can take weeks or months.

Furthermore, the financial market is highly sensitive to expectations regarding the Selic rate. Forecasts and speculations about upcoming Copom decisions may affect market interest rates even before any official change in the Selic rate.

What to Do in a Variable Selic Rate Environment?

The variable interest rate environment, common in Brazil, requires investors and consumers to be aware of changes in the Selic Rate and know how to adapt their financial strategies.

• Fixed Income Investors: If you have fixed income investments, especially those tied to the Selic rate, it is essential to be aware of changes in the Selic rate. Closely follow economic news and market projections to make informed decisions.
• Borrowers: If you are thinking about taking out loans or financing, take into account the current interest rate. When the Selic rate is high, it may be advantageous to wait for a reduction in the rate before taking on new debt.
• Equity Investors: Although variable income is less directly affected by the Selic rate, it is influenced by the overall health of the economy. Follow the economic scenario to make informed investment decisions.
• Financial Planning: Regardless of your investor or borrower profile, solid financial planning is essential. This includes having an emergency fund, avoiding unnecessary debt, and diversifying your investments to reduce risk.

Conclusion: The Fundamental Role of the Selic Rate in the Brazilian Economy

The Selic rate is much more than just an interest rate; it is a crucial tool for conducting Brazil’s monetary policy and has a profound impact on the lives of all Brazilians. Its power to influence lending, investment, consumption and even unemployment makes it one of the country’s most important economic variables.

As a consumer and investor, being aware of the Selic Rate environment and its implications is essential to making informed financial decisions and protecting your assets. Furthermore, understanding how the Selic Rate fits into Brazil’s broader economic policy helps contextualize its role in the country’s stability and growth.

Therefore, monitor changes in the Selic Rate, understanding how they affect different aspects of the economy and acting accordingly is a way to successfully navigate the complex Brazilian financial landscape. The Selic rate is a key element in the financial equation in Brazil, and mastering how it works is a valuable skill for anyone interested in economics and finance.

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