The Brazilian Central Bank announced further cuts to the country’s benchmark interest rate (Selic) last week, bringing it to the lowest level in history. As the monetary authority’s leading tool to control inflation, it would be expected that low interest rates would be accompanied by equally small inflation. However, this is only half true, as the economic frenzy caused by the Covid-19 pandemic has thrown up some bizarre situations, even in the way inflation is measured.
When the Central Bank cut the Selic rate, the two main inflation indexes in the country were showing very distinct results. The prices of household goods, represented by the IPCA index, have been rising very slowly, even posting a rare spell of deflation in April and May.