1. Selic Over
Selic stands for Sistema Especial de Liquidação e de Custódia, or Custody and Liquidation Special System, in lose translation. This rate, the Prime Rate for the country, is the weighted average of the financing operations conducted during one day in the interbank market.
Banks are required to balance their reserves and cash flow daily, to match a reserve goal set by the Brazilian Central Bank (the local equivalent to the FED). If the balance in one bank is below that average, they need to take a loan from a bank that has a surplus, until it reaches the set goal. The same goes for compulsory deposits required by the Central Bank as a means to control the volume of currency in the market – what presents as an effective economical instrument. In other words, at the end of the day, the bank lends the money left over for those who have not.
These exchanges between banks can be done via public or private bond trading. If private bonds are used, CETIP (Central de Custódia de Títulos Privados, or Private Bond Custody Center, in loose translation. This is an open society company that offers services to the financial market in Brazil) registration is required – and profit payment will take into account the DI rate. If public bonds are used, the same type of registration must be conducted with SELIC, and profit payment will be done according to the Selic rate.
These are all very short term operations, usually lasting only one day, and the rate is published yearly – considering a 252 work day year. This rate poses the official reference to all other interest rates in the country, because it’s considered a risk free rate: since we’re dealing with public bonds, the risk would be the same risk of the entire country’s government breaking. All transactions are recorded in computers of DEMAB, which is done at the end of the day, the weighted average rate for the volume of business done in that day. This will be the average Selic rate on that day, which is normally published around 18:30 the same day.
Although the Selic rate and the CDI are very close to each other, they have a small difference. A bank that borrows money to another bank through CETIP, that is, with private bonds, will pay a higher rate than if were borrowing through the Selic, with Government bonds. This is because the risk of a private bond is larger than a government bond, that is, the risk of private bond is the bank that is lending money and the risk of government bond is the government itself.
As the two rates go together, but are not identical, many managers funds, to increase returns on investment funds, prefer to spend money on the Selic rate (Federal Government securities) rather than invest in CDI (Corporate bonds).
The Selic Over is not a fixed rate, and has a daily variation. It tends toward the Selic Goal Rate – established by an organ called Copom (or Monetary Policy Committee, in lose translation), this rate is described in detail below. If the difference between the Selic Goal Rate and the Selic Over Rate is too big, the Central Bank will interfere in the market to cause them to approximate again.
To check the Selic Over Rate history, one must simply access the Central Bank website:
2. Selic Goal Rate
The Selic Goal Rate is an interest rate set by the Central Bank at COPOM meetings (Monetary Policy Committee), and is an important tool to control the heat level of the economy and control inflation. On average, every 40 days COPOM occurs, defined the current Selic Goal Rate at least until the next meeting.
The logic Selic Goal Rate (basic interest rate in the Brazilian economy) is simple. When the Central Bank decides to hike the interest rate, it induces people and businesses stop spending money and making investments because as the rates are higher, the bonds are more attractive, earning more profits. This leads to an increase in investment, thereby taking the currency in circulation and reducing inflation in the medium and long term. The opposite is also true. When the central bank lowers the interest rate, it makes bonds less attractive, causing people and businesses invest less and spend more, thus increasing the country’s growth, the consumption and GDP, however, increasing inflation in the medium and long term.
Once the Selic Goal Rate is set, the Central Bank will start the process of actually buying and selling bond is the open market, focused on forcing the Selic Over Rate to approximate it. So, as a practical example, let’s consider the Copom has decided upon an increase in the Goal Rate. To force the Over Rate to approximate it, the Central Bank will then start trading in public bonds – specifically selling them to increase the availability and thus cause price drops. Banks purchasing these bonds will use the money from the Compulsory Deposit to pay for them, and thus create a debt to the Central Bank. To bring that debt back to the correct balance, banks will trade bonds among themselves and generate a larger trade volume. This will, in its turn, push the Over Rate toward the same hike set by the government to the Goal Rate.
The opposite is also true. If there is a drop in the Selic Goal rate, the central bank will buy government bonds from banks in the open market, thereby increasing bond prices by reducing supply and the need for immediate compulsories deposits to increase, reducing the interest rate to near Selic Goal Rate.
In this way, theoretically, pushing the rates up will prompt banks to reset their reserves at higher prices – and thus force them to charge higher rates on loans they’re offering. If the Selic rate fall, the cost of restoring the reserves will be less, reflecting lower lending rates.
One of the most important aspects of the art of investing money is being able to infer to which way the economy will turn. If the scenario foresees a fall in the interest rates, pre-fixed investments would be the way to go: this way, payment will be guaranteed in the event the prediction comes true. If, on the other hand, the scenario promises a hike of interest rates, post-fixed investments would be ideal: if the rate actually goes up, the profits will be larger. So keeping an eye on the rates and their tendencies is key – particularly when it comes to the Selic, and to the Central Bank’s intentions for the economy’s future.