Understand why it works like a bitter medicine: it’s bad, but it’s good!
Por Me Poupe!
From time to time (45 days, to be more exact) all sectors of the economy are waiting for the update of the basic interest rate – the Selic rate – announced by the Monetary Policy Committee of the Central Bank, the Copom. But why does the entire country keep their eyes glued together, giving F5 on the screen on the BACEN website to see if it has increased, decreased, or remains the same? The basic answer is that the Selic rate has the power to control inflation, which has been rising steadily and making the price of everything so high. But Selic also touches other things on this board called the Brazilian economy. So PAY ATTENTION!
It is precisely to contain this inflationary pressure that the Copom decided today to raise the Selic rate to 5.25% per year, the 4th consecutive increase in the basic interest rate. And as explained well – and gave us this forecast in the latest update of the Focus Bulletin – our variable income expert and CNPI analyst, Eduardo Mira, said that the market expectation for the IPCA (official inflation) for the end of this year reached 6 .79% (a month ago this forecast was 6%). In other words, the economy is “falling in the real” and inflation should remain high (in June it was 0.53% and the accumulated figure for the last 12 months is at 8.35%).
So, as a kind of bitter medicine – it’s bad, but it’s good! – the Selic rate rose to contain the mood of monetary policy. But look, every medicine has a package insert and it’s good to stay on top of everything to fully understand the side effects!
High Selic X New Debts
For those who need to resort to credit – be it a loan, financing, overdraft, or credit card – this is bad news because, with the higher Selic rate, interest rates increase. And higher interest means that you will pay more to pay off these debts (these credits)! So, if possible, avoid new credits, as they are new debts, remember? I explained it in this post.
High Selic X Public Debt
The public debt increased to the extent that the increase in interest rates causes the costs of existing debts to get bigger. As the government has a lot of post-fixed debts, and they will get more expensive, so the interest on the debts increases.
Selic X resumption of economic growth
There is controversy regarding this point because when the Selic increases, its increase causes productive investments – which are those made in the economy in general, such as in machinery, equipment, tools, expansion of production capacity, etc.) to remain committed – because people understand that these productive investments are not as attractive, as fixed-income becomes more attractive.
A higher interest rate means higher costs to finance productive investments, so there will likely be a reduction. In an economy like ours, smaller investments in the economy create less potential for increased productivity in the future. So, when we talk about the Selic considering the economy’s real investment, the increase in the interest rate is a negative point.
… BUT IT’S GOOD!
However, there is also a positive point: when the Selic is higher, inflation is under control and money comes in from abroad, the country begins to attract more attention from the world. If the economy gets back on track, people demand more, companies hire more, etc., and this improves the economy as a whole. So, the higher Selic may indeed lead to the process of resumption of economic growth, due to this stability.
High Selic X Your Pocket
With the increase in the interest rate, the tendency is for inflation to fall and, as a result, prices (food, fuel, electricity, services, etc.) do not rise, remain as they are, or even begin to fall.
High Selic X Investments from abroad
When the interest rate rises in Brazil, given the prospect of maintaining a lower interest rate abroad, more foreign investments are attracted here. Compared to the rest of the world, our rate is higher and it’s more profitable to invest here. With the entry of capital into the country, the exchange rate becomes lower, which is positive for Brazil. And more money in the country contributes to economic growth.
Selic X financial investments
Among the investments that should increase in value with the rise of the Selic, in fixed income, are all post-fixed investments. When someone receives very good and desired news, but doesn’t want to appear too euphoric about something that might not be so good for other people, usually she makes that “landscape face”, right?
Because it is probably this face that those who invest in fixed income or the Selic Treasury do when the basic interest rate increases. It’s because? Because they are investments based on Selic and, as it increases, their profitability also increases. And as the Selic is usually high because inflation is high, inflation-linked investments, such as the IPCA Treasury, are also interesting.
When it comes to variable income, the recommended thing is to acquire knowledge and always be informed, to be able to make the choices, as they vary according to the goals of each one. To help you think about equities considering this moment, there is a brand new special episode of Poupecast about opportunities on the Stock Exchange with the highest Selic. In this exclusive Poupecast, Professor Eduardo Mira receives another fellow CNPI analyst, Daniel Nigri, for an analysis of the best sectors and companies listed on the Stock Exchange to see how high the Selic rate is! Unmissable!
I asked Nath Arcuri to talk about this hot topic here in this video, which just came out of the oven! Click on it, and our finance muse explains how the increase in the Selic rate impacts your investments and the opportunities that arise with this new high.