The Selic rate is known for being the basic interest rate for the Brazilian economy and used as a reference for financial operations.
This rate comes from the Central Bank’s Special Settlement and Custody System (SELIC). This system works in a computerized way and is intended for the registration, custody and settlement of federal public securities.
According to dictionaryforall, the rate calculation arises from the weighted average of all daily operations backed by government securities. At the end of the day, the daily Selic rate is known as Selic Overnight or “Selic over”.
The Selic over rate is the rate and comes with the day-long loan that banks make to each other and that use their government bonds as collateral. The “Selic target” rate is defined by the Central Bank, which uses it as a monetary policy maneuver in the country.
Selic rate today
The target for the current Selic rate is 3.00% per year. The values achieved monthly can be seen in the table below:
|Monthly Selic Table|
How does the Selic rate work?
The Selic rate defines the remuneration of most public bonds issued by the National Treasury. The bonds act as a loan from the government to cover public spending, as tax collection alone is not enough.
Most government bonds are held by the country’s banks, which use them in daily interbank transactions.
The Selic rate is defined by the Central Bank and functions as the main instrument of monetary policy. With it, the institution seeks to maintain the purchasing power of the currency according to the level the economy is at and according to the inflation target for the period.
At this rate, the policy adopted seeks to influence all interest rates in operation in the economy. In times of recession, for example, it is necessary to reduce interest rates for investors and consumers to borrow money again.
How is the Selic rate defined?
Every 45 days, the Central Bank of Brazil holds the Monetary Policy Committee (COPOM), in which one of the topics discussed is the target to be followed for the Selic rate.
The Selic rate is defined when the government seeks to raise funds for the Treasury, offering its bonds to banks in exchange for a return, remunerating them for this rate.
However, these same bonds held by banks serve as a guarantee when they need to borrow money, since by law banks cannot generate an excess of withdrawals in relation to deposits.
How the Selic rate affects the country’s economy
The Selic rate serves as a reference rate for other interest rates on the financial market, which makes it the floor for interest rates in the country. For this reason, a drop in this rate causes some investments, such as savings itself, or also CDBs and LCIs and LCAs and, mainly, Tesouro Direto.
On the other hand, investments in the stock exchange tend to pay even more with Selic rate cuts. This is because the companies that offered shares on the stock exchange have the opportunity to invest more in their production and increase their profits, which are then shared with shareholders.
In addition to the financial market, it influences the entire economy, including inflation, exchange rates and population consumption.
Variations in the Selic rate and inflation
With an increase in the Selic rate, plus an increase in interest rates across the economy, there is a decrease in consumption and demand for financing or loans. This causes inflation to fall again, having a negative relationship with the Selic.
Variations in the Selic rate and exchange rates
With an increase in the Selic rate, more foreign investors are attracted and seek the Real to invest in Brazil. With this, a great demand for the Brazilian currency causes an appreciation, managing to buy more dollars or other foreign currencies.
Variations in the Selic rate and consumption
As previously seen, a Selic rise causes shares on the stock market to devalue. This relationship is due to the fact that people and companies seek less credit from banks with the highest rates.
The same is the case with inflation, since with lower demand, the prices of various products in the economy are reduced.