Introduction to Selic

Ana Gabriela Verotti Farah

Staff Writer
The Brazil Business

Updated

7 May 2013

Even though a lot of people have already heard about Selic, most of them don't know exactly what is it and how it affects their lives. Learn these aspects in this article.

Selic is the abbreviation for Sistema Especial de Liquidação e de Custódia and is known abroad as Special System for Settlement and Custody. Also known as Taxa Selic, or Selic tax, it is the basic interest tax defined by the government.

This is a simple way to put it. In a more complex explanation, Selic is the interest rate tax for loans between banks in operations that last only for one day and are also called "overnight". These operations have government securities as guarantee.

The Purpose of Selic

Selic is the rate based on which private and public banks calculate their own interest rates. Therefore, if the governments decreases the Selic rate, consequently the banks have to decrease their rates too, and the other way round. The great difference between Selic rate and the rates of the banks is explained by the financial institutions as the value of the risks involving clients not paying, as well as the tax collection.

Usually the government reduces Selic when it wants to encourage the offer of loans with lower rates,  stimulating the consumption and livening up the economy. If, however, there is a vibrant economy and the inflation is increasing, the government raises Selic, the loans become more expensive and people's consumption decreases, avoiding that prices increase.

How is Selic Established?

The Selic rate changes every day, but in practice, its average is always a number next to the target established. Every 45 days, this target is redefined in meetings with the government and the Comitê de Política Monetária. Known as Copom, it is the Monetary Policy Committee, which consists of eight members of the Central Bank Board of Directors.

The Copom Meetings

These meetings always last two days and are divided in two stages, one made on a Tuesday and the other on a Wednesday. In the first day, there are discussed all the aspects that can effectively influence the economic environment, such as exchanges, inflation, the international economy and others. In the second day, the members of the committee discuss the possible scenario and try to reach an agreement concerning the interest rate.

When the meeting is over, there are published the decision made by the committee and the viés, which is the tendency for the next days: if the rate will remain the same, increase or decrease. In the cases when the decision is not unanimous, the voting results are published as well.

The first Selic target was established in March 15, 1999. Copom was created in 1996, and in these three years between its creation and Selic's creation, what used to be fixed for the monetary policies was the basic tax of the Central Bank, known as Taxa Básica do Banco Central or TBC.

What Does an Increase in Selic Mean?

The increase of Selic, as it happened in April 2013, can be understood as an attempt of the government to control the inflation that surpassed a target rate. Increasing the basic rate makes banks increase their rates as well. As mentioned before, this decreases the number of loans, people's consumption and the prices of the products.

The problem is that it also makes it harder for companies to get loans, since they are more expensive for them as well. Without money, companies stop investing and neither the production increases, nor the technology is developed.

Also, with a high interest rate in the country, foreign investors start buying Brazilians Reais to be able to invest in Brazil, and this currency is appreciated against the dollar, making the foreign products less expensive. This consequently increases imports and makes the country develop less.

Increasing Selic is not the end of the world; it is a measure that has to be accompanied by other steps in order to maintain a balance in the economy. This shows how important it is to know the influence that a change in a tax rate has in people's lives, even when its impact is not clear to everybody.

History of Interest Rates

The following table provides the change in Selic rates from April, 2012 to May, 2013. The complete history of Selic rates can be found in Central Bank's website.