Brazil’s benchmark interest rate falls to 10.5% per year

For the fourth consecutive time, the Central Bank’s Monetary Policy Committee (“Copom”) has reduced the country’s interest rate, the Selic, by 0.5 percentage points. So, the Selic went from 11% to 10.5%.

Back at the beginning of 2011, Copom faced a surge of inflation (there was an election in 2010) and raised the Selic five consecutive times until it peaked at 12.5% in July.

However, six weeks later at its next meeting in August 2011, Copom began to loosen the reins as the international scenario worsened. In a controversial decision that was not unanimous, Copom voted 5 to 2 to lower the Selic by 0.5 percentage points and has continued the reductions at subsequent meetings.

The successive reductions of the Selic are in line with market expectations as can be seen in weekly financial institution surveys by the Central Bank, known as the Focus report. According to the latest Focus, the market forecast is for the Selic to close out 2012 at 9.5%. The conventional wisdom is that reducing the Selic stimulates economic activity by making credit cheaper and boosting consumer spending. Lower interest rates also improve the government’s balance sheet by lowering the cost of the public debt. A lower Selic also has a positive effect on the exchange rate, expanding exports and lowering the amount of dollars that enter the country, which keeps the real from further valuation against the dollar.