By LUIZ SERGIO CANÁRIO*
The effects of monetary policy on economic policy, guided by neoliberal logic
SELIC is the acronym for Special Settlement and Custody System, created in 1979. This system exists for the registration, custody and settlement of public securities. Financial institutions accredited and authorized by the Central Bank of Brazil record all their operations with public securities issued by the National Treasury in real time. Institutions establish the price for trading securities and then register them with the SELIC. The settlement of these operations is immediate.
Ownership of the securities traded is transferred to the person who purchased it and the amount agreed between the parties for the transaction is deposited into the account of the person who sold it. Very similar to buying any merchandise, for example bananas at the market. Once the price has been agreed with the vendor, which is often negotiated below the price shown on the poster, he delivers the banana and receives the agreed amount. Operations in the financial market are very similar to operations carried out by ordinary people on a daily basis. There is no mystery or ultra-sophisticated operation. The financial market is where financial assets are traded. Just like with bananas, whoever buys receives the “goods” and whoever sells receives the agreed value.
But what is the role of the basic interest rate in this market? In reality, the SELIC rate is two: the SELIC Target rate and the SELIC Over rate. The Target is the one set at each meeting of the Monetary Policy Committee – COPOM at each of its meetings. In reality, the composition of COPOM is the board of directors of the Central Bank. Common sense is that this is the rate that applies to transactions with public securities. But not quite. It represents more of a parameter than an effective rate.
Financial institutions carry out various transactions, including loans, throughout the day. If these transactions use public debt securities as collateral, or guarantee, this transaction is required to be registered with the SELIC, which takes custody of the securities used as collateral. This transaction can be done using an interest rate agreed upon by the participants. And it may or may not be the current SELIC rate.
In short, Bank A borrows R$1.000 from Bank B and gives it as a guarantee that it will pay public bonds, the guarantee of the operation. And they agree on an interest rate for that. As this operation is registered with SELIC, the BCB knows the value and interest rate agreed and locks these securities in the name of Bank A as collateral. Bank A cannot use these securities either to sell or to obtain a new loan. They are under the custody, or custody, of the Central Bank. At the end of the day, SELIC calculates the weighted average of all interest rates used in transactions. This is the SELIC Over rate. The name comes from a type of application, overnight, used in times of high inflation. It was what yielded the money invested from one day to the next.
Historically, as can be seen in the table below, the Over rate is slightly lower than the Target rate. And it is the Over rate that is used as the basis for transactions with public debt securities both by the National Treasury, the Central Bank and financial institutions. The Meta rate is used when financial institutions need to borrow money from the Central Bank. These are Rediscount operations. In this situation, the interest rate applied to the Redesconto is the Target. It works as a kind of penalty for those who cannot make ends meet on their own.
Below is an example of the totalization of operations carried out in the SELIC, with volumes and statistics, for ten days in 2024 compared to ten days in 2023. The convergence of the Over rate to the Target rate is great. The very low standard deviation indicates a low dispersion of the values considered. On 10/07/2024, most negotiated rate values are only 0,029 percentage points away from the average value.
COPOM sets the Target interest rate to fulfill its basic obligation as a monetary authority to maintain the value of the currency by converging inflation towards the target. Information from various sources is used for this purpose. After each meeting, minutes are released informing the debate that led to the setting of the rate. More details about this can be seen here. The inflation target is set by the National Monetary Council – CMN, the highest authority in Brazil's financial system, formed by the Ministers of Planning and Finance and the President of the Central Bank.
SELIC serves as a parameter for setting all interest rates in the financial market. It is not used for operations that an ordinary person carries out, whether credit or financial investments. The movement of rising and falling affects the rates charged on financing and investments. If the SELIC rises, the tendency is for the interest rate to increase throughout the economy. The effect is always to reduce economic activity. The opposite movement by reducing the interest burden contributes to an increase in activity.
In the view of economists today at the center of decisions on economic and monetary policy, this movement tends to control inflation. The logic is that if activity decreases, prices also decrease and vice versa. But this view ignores the social costs of maintaining rates at the level SELIC is at today. The cost to the country is immense. R$816 billion were spent on paying interest on the public debt alone in 2023. The country is trapped in a logic that strangles public and private investment. The effects of monetary policy on economic policy, guided by the same neoliberal logic, is a reduction not only in investment capacity, but also in the resources available to pay the bills for all public expenses, including health and education.
Understanding how this cruel management machine currently handed over to learned economists works is essential for the people, society as a whole, to become aware of how decisions that affect their lives are made. We cannot allow such important decisions to be made by half a dozen enlightened people who set up systems and processes, often explicitly with the intention of making them difficult to understand and surrounded by secrets. The Central Bank does not publish open information at the level of participants in its operations and information bases.
*Luis Sergio Canario is a master's student in political economy at UFABC.
the earth is round there is thanks to our readers and supporters.
Help us keep this idea going.
CONTRIBUTE
