Stated below is what was written in a leading newspaper and why the Central Bank of Brazil’s has increased its interest rate and its impact on the economy. Unless you are an economist it might not make any sense, and then if you are it also may not coincide with your way of thinking. However, try to understand Brazil’s complex financial scheme.
Firstly, for fear that Brazilian inflation will continue to rise whilst driven by uncertainties regarding rumors about the United States economy after the election of Donald Trump, and regarding President Lula’s massive government spending. Lula represents the left-wing Labour Party (PT) government.
The above reasons led Copom, the Monetary Policy Committee of the Central Bank in Brazil over a two-day meeting to discuss how such gossip could affect the economy, and therefore chose to increase the basic interest rate on November 6th by 0.5% to 11.25%.
Previously, the benchmark interest rate called the Selic had been increased on September 18th to 10.75%, previously it was 10.5% on July 31st though there had been two cuts in March and May by .25% each.
The nationalist policy suggested by Trump could lead to high interest rates in the US and further increases in Brazil. The president-elect said during his presidential campaign that he intends to close the economy by increasing taxes on the import of various goods and services. This type of measure would increase the US fiscal deficit, raise the prices of goods within the country and could force the Fed (Federal Reserve).
The observation of economic mediators regarding the fiscal scenario has significantly affected asset prices and their expectations, especially the risk premium and the exchange rate. The Committee reaffirmed that a credible fiscal policy committed to debt sustainability, with the presentation and implementation of structural measures for the fiscal budget, would contribute to anchoring inflation expectations and reducing risk premiums on financial assets, consequently impacting monetary policy.
So, if you don’t understand how the system works, the following should give you a better understanding:
Interest rate
The Selic rate is the overnight lending rate and the basic interest rate for the Brazilian economy. The Monetary Policy Committee (Copom) of the Central Bank of Brazil sets the rate every 45 days. The Selic rate is used as a reference for daily financing rates for government bonds.
Financial market infrastructure
The Selic is a computerized system that manages the registration, custody, and settlement of public securities issued by the National Treasury. The Selic is the central depository for most of these securities. The system is used by banks, savings banks, securities brokerage companies, mutual funds, and other institutions.
The name Selic comes from the acronym for Sistema Especial de Liquidação e de Custódia, which translates to Special System for Settlement and Custody.
Some factors that have influenced the Selic rate in 2024 include:
Inflation: Inflation expectations for 2024 are around 4.4%.
Global economy: The Central Bank has cited uncertainty in the global economy, including the US economic outlook and global inflation dynamics.
Domestic economic indicators: Domestic economic indicators have been more dynamic than expected.
Fiscal policy: The Central Bank has called for adjustments to public spending.
Obviously, it is a lot more complex than meets the eye, but as Copom represents the banking system and banks have the monopoly of the economy in Brazil, it’s pretty clear that some dodgy business is in the pipeline.
Take care!
Prof. Carl Boniface
Vocabulary builder:
Benchmark (n) = standard, level, target, scale, point of reference, yard stick
Dodgy (adj) = suspect, unreliable, untrustworthy, doubtful, dubious, (ant) reliable
Pipeline (n) = tube, cylinder, channel, conduit, duct. In the pipeline is an idiom that means awaiting completion or processing; being developed.
"New treatments are in the pipeline." (Syn) = in preparation, being prepared
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