Analyzing the Diverse Effects of Selic on Pricing Across Economic Sectors
A recent study conducted by the Center for Research on Macroeconomics of Inequalities (Made) reveals that the impact of the Selic rate on prices in the Brazilian economy varies among the different groups of goods and services that make up the Broad Consumer Price Index (IPCA). According to researcher Marina Sanches, who holds a PhD in Economics from the School of Economics, Administration, Accounting and Actuarial Science (FEA) at USP and is one of the authors of the study, Brazilian monetary policy, based on controlling the Selic rate, is not always equally effective in containing inflation in all sectors.
“The increase in interest rates affects the economy, mainly by controlling aggregate demand,” explains Marina. She explains that, by raising the Selic rate, the Central Bank makes credit more expensive, discourages consumption and investment, and increases unemployment, which helps to alleviate pressure on prices. However, this effect is not homogeneous across the different components of the IPCA. Groups such as food and beverages, household goods, and clothing are more sensitive to the increase in interest rates, while others, such as health and housing, do not respond in the same way.
Marina emphasizes that price sensitivity to the Selic varies according to the sector. “Food and beverage prices, for example, fall when interest rates rise, because these sectors depend more on credit and disposable income,” she explains. However, sectors such as housing and communications, which have longer contracts and price regulation, do not show the same response. “The health and personal care sector, interestingly, responded positively, since demand is inelastic and the increase in financing costs ends up being passed on to the consumer,” added the economist.
Studies and data
The researcher highlights that the study used data from Brazil between 2007 and 2023 and applied an econometric model to measure these impacts. The main result shows that, on average, raising the Selic rate reduces aggregate inflation by just 0.02 percentage points after 24 months. “This suggests that inflation, in aggregate, is not very sensitive to the interest rate,” says Marina, corroborating similar results found in the economic literature.
The study also suggests that the effectiveness of monetary policy depends on the group of goods that is driving inflation. “If the rise in inflation is driven by food or household goods, which respond more to the interest rate, monetary policy will be more effective. But if inflation is caused by transportation or health, the Selic rate will have less impact,” explained the researcher, highlighting that this limits the effectiveness of monetary policy.
Marina Sanches warns of the social implications of this scenario. “Monetary policy has a high social cost, such as increased unemployment and income inequality. If the Central Bank does not take into account the dynamics of the different components of the IPCA, it may end up sacrificing the economy and the population without achieving the goal of controlling inflation,” she said, suggesting a more cautious approach in formulating decisions on interest rates.
The Made study reinforces the need to reassess the mechanisms for transmitting monetary policy in Brazil. Marina concludes by saying that the Central Bank should consider not only aggregate inflation, but also the sectors that are exerting greater pressure on prices, so that the policy is more balanced and effective, minimizing the negative impacts on society.