Brazil Central Bank cuts benchmark interest rate to 3.75% a year

Amid the economic crisis arising from the pandemic of the new coronavirus, Brazil’s Central Bank has reduced the economy’s benchmark interest rate for the sixth time in a row. The Monetary Policy Committee, or Copom, unanimously decided to cut the Selic rate to 3.75 percent a year, down 0.5 percentage points.

The decision came as a surprise to financial analysts. As per figures from the bank’s Focus survey, most economic agents expected the decline to reach four percent a year at this meeting plus an addition reduction to 3.75 percent before 2020 was over.

In a statement, Copom argued the data indicated a gradual recovery in the economy, but current parameters still do not reflect the aggravation of the crisis brought about by the coronavirus. Among the unpredicted factors, the Central Bank named the sharp slowdown in growth worldwide, the shrinkage in commodity prices and the higher volatility of financial assets.

The decision of the US Federal Reserve and the main central banks the world over—which brought the interest down in most economies in the last few days—paved the way for a bigger-than-expected reduction.

The Wednesday (18) move brings the Selic to the lowest level since the beginning of this time series, in 1986.

The benchmark interest rate is used in the trading of securities under the Special Clearance and Escrow System (Selic) and serves as a gauge for the other interest rates in the economy. By increasing it, the Central Bank curbs the excess in the demand exerting pressure on prices, as higher interest makes credit more expensive and stimulates saving. By cutting the benchmark interest, Copom makes credit cheaper and encourages production and consumption, but weakens its control over inflation. To cut the Selic rate, the monetary authority must be confident that prices are under control and do not run the risk of going up.

*Vladimir Platonow contributed to this article.