At the last meeting of 2023, Copom is expected to lower interest rates to 11.75%, the lowest level in almost two years

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The 0.5 percentage point cut is what most bank economists are betting on. If confirmed, this will be the fourth consecutive reduction in the Selic rate. The Monetary Policy Committee (Copom) of the Central Bank (BC) meets this Wednesday (13) and is expected to reduce the economy’s basic interest rate from 12.25% to 11.75% per year. The decision will be announced after 6pm. The 0.5 percentage point cut is what most bank economists are betting on. If confirmed, this will be the fourth consecutive reduction in the Selic rate – which will fall to the lowest level since March 2022, when it was at 10.75% per year. Considering the good behavior of inflation, the financial market’s projection is that the interest rate will continue to decline throughout 2024, and that it will end next year at 9.25% per year. How decisions are made To define the basic interest rate and try to contain rising prices, in the inflation targeting system, the BC makes projections for the future. At this moment, the institution is already aiming for next year’s target, and also for the first half of 2025 (in twelve months). This is because changes to the Selic rate take six to 18 months to have a full impact on the economy. Next year’s inflation target, defined by the National Monetary Council (CMN), is 3% and will be considered met if it fluctuates between 1.5% and 4.5%. From 2025 onwards, the government changed the inflation targeting regime, and the target became continuous, at 3%, and could fluctuate between 1.5% and 4.5% without being breached. Last week, financial market economists estimated that inflation in 2024 will amount to 3.93% and in 2025, 3.50%. Analysts give their opinion According to Pedro Oliveira, from Paraná Banco Investimentos, inflation in Brazil and around the world has been benign, that is, several items within the index have shown deceleration. “The price of commodities [produtos básicos, como petróleo e minério de ferro] fell significantly since the last Copom meeting, especially the price of oil, which should help inflation in the coming months”, he assessed, in a statement. In analysis, XP Investimentos considered that, since the last Copom meeting, in the beginning of November, the news was benign for short-term inflation in net terms, with a fall in interest rates in developed countries, with a decline in inflation and oil prices. The institution projected continuity of interest cuts, with the Selic being reduced to 11.75% per year this week and 10% per year at the end of 2024. “The main risk, in our view, remains on the fiscal side. Recent news suggests new expenditures outside the limits of the recently approved framework, and less budget contingency if the fiscal target is at risk of not being achieved. These signs reinforce our view that fiscal policy has an expansionist bias, which tends, at some point, to put pressure on inflation expectations”, added XP, in a statement. The Minister of Finance, Fernando Haddad, has insisted on goal of zero deficit in public accounts in 2024. To achieve this, it needs to approve a series of measures to increase revenue, worth R$ 168 billion – a value announced in August this year. The financial market, however, estimated in November that accounts will have a hole of R$90 billion in 2024. Interest rate cut According to experts, the reduction in interest rates in Brazil will have some consequences for the economy. See some of them below: Reduction in bank rates: the trend is that interest cuts are passed on to customers. In October, the average interest rate charged by banks in operations with individuals and companies fell for the fifth month in a row and reached the lowest level since December of last year. The data are from the Central Bank. Economic growth: with lower interest rates, the expectation is that there will begin to be better consumption behavior among the population and, also, an improvement in productive investments, positively impacting the Gross Domestic Product (GDP), employment and income. Activity data has been a positive surprise this year. Improvement of public accounts: interest reductions also benefit public accounts, as they reduce interest expenses on public debt. In 2022, interest expenses totaled R$586 billion. As a percentage of GDP (5.96%), it was the highest level since 2017. Analysts estimated that the reduction in interest rates could generate savings of R$100 billion in 2024. Impact on financial investments: investments in fixed income, such as in Tesouro Direto and in debentures, however, they tend to have a lower yield, over time, than they would have with higher interest rates. With the fall of the Selic, the tendency is for investments in variable income to become more attractive. Experts interviewed by g1 considered, however, that this movement tends to occur over time.

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