The Central Bank’s Monetary Policy Committee (Copom) decided on Wednesday to cut Brazil’s Selic benchmark interest rate by 0.50 to 7 percent per year – a record low. Copom meetings are held every 45 days. For the 10th straight time, the committee cut the Selic from 14.25 percent in August 2016 to its current rate of 7 percent.
Lower interest rates, combined with low inflation (down to 2.7 percent in October from over 10 percent in 2016), is helping Brazil’s economy to climb out of its worst recession in history.
In 1999, Brazil’s basic interest rate was at 45 percent per year.
Copom, however, added that economic recovery is not yet solid. The policy makers advised that the approval of structural reforms – including the overhaul of Brazil’s uber-expensive pension system – will be instrumental in keeping rates down. Analysts predict that the Selic, given a favorable scenario, will remain unchanged at 7 percent in 2018.
However, Brazil still holds the 4th highest real interest rate (after discounting inflation), at 2.88 percent per year. Only Turkey (5.87percent), Russia (4.18 percent), and Argentina (3 percent) have higher real interest rates.
A lower Selic rate could stimulate credit, an important element in Brazil’s economy. It also alleviates the pressure on companies, who will pay fewer taxes. Moreover, it helps reduce the cost of the country’s public debt.
The downside of cheaper credit is a larger indebtment potential, which could spell trouble for consumers in the long term. Additionally, it lowers gains from savings accounts, which is the most common form of investment in Brazil.