A rise in the Selic rate reaches the population before having an effect on inflation; understand

The impact between the Central Bank announcing a change in the Selic rate and the effects being really perceived in the economy is not immediate. The intended results with the hike in interest rates to 10.75%, announced earlier this month in yet another attempt to contain inflation, for example, should only be felt in a few months. But this mismatch does not free the population to perceive the impact in the short term, on a daily basis.

According to experts consulted by the CNN Brasil Businessit is in the population that the first effects of Selic adjustments appear, even before reflecting on variables such as inflation and Gross Domestic Product (GDP).

Immediate impacts

The most immediate effect when the basic interest rate varies is exactly on the interest charged by financial institutions on loans or financing.

Claudia Yoshinaga, a professor at FGV, says that this increase usually occurs in the hours following the decision of the Monetary Policy Committee (Copom). Another more immediate effect occurs in the investments.

“If they were investments in post-fixed fixed income, the effect occurs right away and there is a low or high interest rate. In pre-fixed, the rate is established before, and does not change. If a person invested in a bond with a rate of 9% two years ago, when the Selic was low, today he is already losing money”, says Yoshinaga.

Companies also do not pass unscathed, according to professor Margarida Gutierrez, from UFRJ (Federal University of Rio de Janeiro). “When the cost of credit rises, the sectors immediately affected are those that have financed goods of greater value, and for companies the cost of credit rises”, says Gutierrez.

Insper professor Juliana Inhasz also talks about an indirect impact of the change in interest rates. “In general, those who do not need credit feel this effect, sort of indirectly, when companies take longer to modernize, increase production. These are projects and companies that don’t get off the ground, they don’t have new products,” she says.

In these cases, the movement reflects a longer-term effect of the Selic rate, with stronger effects for the economy in general.

after effects

The Selic discharge process results in what the UFRJ professor calls a “chain of effects”. But the fullness of these effects on demand — which, when decreasing, would lead to a drop in prices — takes a few months to occur.

The time varies from country to country, but the Central Bank estimates that in Brazil it is between seven and eight months. “The rise takes up to 8 months to reduce the level of activity, and 20 or 18 months to reduce the rate of inflation”, he says.

The process is linked not only to the higher cost of credit, limiting the ability of companies to invest and purchase by the population, but also through a “channel of expectations”. In other words, if people and companies already expect interest rates to rise, they “tighten their belts” even before that happens.

“They all work towards reducing inflation, due to the drop in aggregate demand, but these are effects that take time to be fully processed”, he says.

Inhasz also says that this process takes time because the Copom’s interest rate decision does not lead to an immediate increase in the Selic rate, it only indicates that it will be done.

The time, period to feel the effect depends on the BC implementing the monetary policies that take the interest rate wherever it wants, influencing the economy, what it discloses is more of a goal, intention, and it has a time for that

Juliana Inhasz, professor at Insper

Thus, the environment is formed by “the time for the policy to be made, the reaction time of the agents, the change of attitude, and when the agents make the decision”. [de investir]first they wait for the policy to be put into effect and then they start to make the loan, purchase, production and sale process, there is a whole step by step to get there”, he says.

The lack of investment leads, according to Yoshinaga, to a lack of job creation, or to lower wages, which again impacts the population’s consumption, already limited by more expensive credit.

As these factors accumulate, the effects for the so-called macroeconomy arise, considering a fall in inflation, GDP and a rise in the unemployment.

On the other hand, when the inflationary scenario allows the reduction of interest rates, this entire process is inverted, but it also takes time to materialize, that is, the economy does not heat up overnight when the Selic falls.

time variation

The time for this entire process to occur is not the same in all countries and economies, in what Inhasz calls the “maturation time”.

“When there is a lot of availability of capital, a good installed capacity, easy access to technology, economies react faster than the Brazilian economy, which has more bureaucracy, access to technology is not immediate, production capacity is already impaired,” he says.

Gutierrez also cites the rigidity of prices in that country, that is, their ability to vary more quickly or slowly, which is linked to elements such as price components and the wages of the population, with their readjustment rhythms.

“The more rigidity in prices, the longer it takes to respond to increases. The expectation of inflation also plays a role in this, in the response of the sectors to the highs. In general, the more effective monetary policy is, the shorter the time, but the economy’s response to all these phenomena takes longer.”

In the Brazilian case, Yoshinaga says that the causes of inflation in Brazil are not currently concentrated in domestic demand, but in problems such as high prices for commodities and devaluation exchange.

“This also has a longer response time, it is not increasing the rate at which people stop consuming and inflation is insured. Timing depends a lot on the motivation to rise and fall. Behind the current high the objective is to control inflation which is not purely on demand,” she says.

In Brazil, one central bank director has already stated that the Copom will only be able to interfere in 2022 inflation until the March meeting, since from the next meetings the effects would be focused on the 2023 data.

“From an economic point of view, it makes sense to reduce the pace because it accelerated earlier, and then there is this anchoring of expectations. The shock came from external and internal pressures, now the signal has been given, and the pressures should begin to subside, first through internal resolutions, as in the water crisis, and also in the external scenario”, says Inhasz.

For her, “the Central Bank will continue to rise [os juros]but the rise was strong, so it has a real impact and seeks to put inflation on a desired path”.