The decision by Brazil’s central bank to raise the benchmark Selic rate to its highest in more than five years in an attempt to curb inflation increases the challenges for companies to arrange financing.
The bank hiked the Selic to 13.25% from 12.75% on Thursday. It was the 11th consecutive increase since March last year, when the rate was at 2%, its lowest ever.
“The current high level of interest rates make it virtually impracticable for a company to get a direct loan from a local bank, because it’s very difficult for a project to have a rate of return much above these levels. In view of this, finance departments of companies need to be creative, seek cheaper financing lines including from international institutions,” Marco Fontoura, president of Brazilian construction firm Construtora Elevação, told BNamericas.
With the high level of the Selic, local banks opt to park their cash in government bonds that are tied to the base rate, instead of assuming the risks of loans to companies and individuals, who are obliged to pay a rate much higher than the Selic.
Brazil’s inflation reached 11.73% in the 12 months ended May, well above the central bank’s target for the year of 3.5%.
“The interest rate trend is set to remain high at least until the second half of next year, because the central bank will also have to wait to know who will be the next president of Brazil, after the elections in October, to know if there will be additional fiscal pressures next year,” Andre Perfeito, chief economist at local brokerage Necton, told BNamericas.
“Only when there is greater clarity about the next government will it be possible to have a clearer indication about when interest rates may start to fall,” he added.
The central bank indicated new hikes are planned.
“The [policy] committee considers that, given its inflation projections and the risk of a deanchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into even more restrictive territory,” the bank said in a statement after the rate decision.
The monetary authority underlined that it is considering “a new adjustment, of the same or lower magnitude [of the Selic]” at its next meeting on August 3.
Additional pressure is the fact that the US Federal Reserve is also embarked on a monetary tightening cycle.
As an emerging market economy, Brazil tends to maintain an interest rate well above developed economies to prevent capital flight.
