Interest Rates Reach Historic Low in Brazil

Brazilian Central Bank building. Wikimedia Commons

The Central Bank Committee for Monetary Policy (Copom) announced on February 5 the new target interest rate at 4.25% . It is the lowest value in nominal and real terms since the ongoing regime of inflation targeting began in 1999. In the statement that announced the change from 4.5% to 4.25%, authorities indicated that this would likely be the last in a series of cuts that began in 2019. With inflation projected at 3.40% for 2020, the measure reflects contradictions in the Brazilian economy: a high unemployment rate resulting from the crisis, but a slow economic recovery. 

Since 1999, Copom`s board members meet every 45 days to announce the interest rate (Selic) for Brazilian public debt securities over the next month and a half. This mechanism allows the Selic rate to influence interest rates throughout the entire Brazilian economy, making it an effective tool to combat inflation. If inflation is on a rising trend, the Central Bank is expected to increase interest rates, increasing the price of credit and disincentivizing consumption – thus putting a break to inflation. 

After inflation reached a peak of 10.67% in 2015, as the country went through its most severe economic crisis, interest rates skyrocketed to 14.25%, a high that lasted from July 2015 to August 2016. 

Source: Brazilian Central Bank. Elaboration: The Caravel

As public trust returned to the Central Bank and inflation slowly lowered to normal levels, interest rates began to plummet. There was an initial drop from the end of 2016 to early 2018, followed by over a year of stagnation during the uncertainty of the elections. Since late July 2019, Copom has successively lowered the Selic rate, finally ending the process in early 2020 with the historic low of 4.25%. The Central Bank indicated that it would be the last cut in the series, meaning that investors may safely get used to the rate of 4.25%.

The evolution of the Selic rate exposes much about the Brazilian economy. The country has not yet fully recovered from the economic dire straits of 2015. Unemployment still refuses to give in at 11.2%, which partially explains the low inflation – as income goes down, so does consumption. Nonetheless, the country is slowly overcoming the crisis, and the improvement in the domestic scenario is also partially responsible for the low interest rates: Brazil seems to be a relatively stable country right now, and institutions are working.

Adding to this is the series of reforms that also contributed to the improvement of Brazil’s economic perspectives. These would include the 2017 Labor Reform, the 2017 reform on the federal investment bank’s (BNDES) interest rate, and the massive Pension Reform of 2019. The reformist mood is far from over, though: there are more to come, if the government has any say in it. Brazilians can expect a tax reform, a reform on public administration, and a reshaping of federalism – the first of which will likely happen already in 2020.

In short, even though there are still over 11 million unemployed Brazilians, the country accumulates positive economic results. The best example of this might be the fact that Brazil is gradually becoming a viable destination for investments, leading to the country’s rise to fourth place in the ranking of  recipients of global investments in 2019 – ahead of the United Kingdom and France. 

There are, however, challenges to this economic recovery. The executive branch is surrounded by crises, and the government's environmental agenda is a reason of major concern among analysts, as Paulo Guedes, the Economy Minister, learned at the World Economic Forum in Davos. Unless Brazil overcomes these issues, long-term sustained growth is unlikely.