Selic rate and investments: how the rate affects your finances

Discover the relationship between the Selic rate and investments!

Selic rate and investments: have you ever stopped to think about the relationship between Selic and the returns on financial investments?

The index influences the behavior of other indicators, such as the IPCA and the CDI.

From time to time, newspapers announce that it has risen or fallen.

Despite being a common indicator, many Brazilians have doubts and are even unaware of the main characteristics of the basic interest rate.

So, in today’s post, we’ll explain the relationship between the Selic rate and investments and, of course, show you how it all works in practice. Keep reading to learn more about the subject.

What is the Selic rate?

The Selic rate is the basic interest rate in our economy.

It influences other interest rates, such as those charged on financing, loans and even returns on financial investments.

Selic has this name because of the Special Settlement and Custody System.

In fact, it is a system of Central Bank (BC) which records transactions related to National Treasury securities.

The average rate recorded in these operations, which are carried out daily, is equivalent to the Selic rate.

The volume of banking transactions is enormous. When you add up the amount from all institutions, the total increases even more.

For this reason, the Central Bank requires banks to close the day with a balanced cash balance. The aim is to avoid excess money in circulation and control inflation.

But after all, what are these operations?

These are very short-term loans that institutions make between themselves.

In this way, a weighted and adjusted average is created, which is published daily.

When and how is the Selic rate defined?

The Selic rate is set by Copom, the Central Bank's Monetary Policy Committee.

Copom meets every 45 days to decide whether the Selic rate will increase, rise or remain the same.

In each of these meetings, participants discuss the prospects for the Brazilian and global economy, in addition to evaluating market behavior.

Only after receiving and analyzing all the necessary information do Copom members vote on the direction of the Selic rate.

On February 2, 2022, Copom decided to increase the Selic rate to 10.75% per year.

Selic rate and inflation: what is the relationship?

The Selic rate is an extremely important tool, as it allows the government to control inflation.

Both inflation and the Selic rate are linked to the Brazilian economy and consumption. In fact, one of the main functions of the basic interest rate is to control inflation.

Whenever it fluctuates, loans and financing become more or less expensive. Furthermore, consumption may or may not be stimulated based on the cost of credit.

This is because when there is an increase in the basic interest rate, the government makes money “more expensive”.

But when the Selic rate is reduced, interest rates become lower. The idea, in this case, is to stimulate the economy and consumption.

Selic rate and investments: what is the relationship?

In addition to influencing the economy in general, the Selic rate also impacts the return on financial investments.

In fixed income investments, interest rates are used as a reference to remunerate investments.

In variable income, the relationship occurs indirectly. However, the impact generates an effect on investments.

To help you better understand the subject, we will explain each of the cases below.

Fixed income

There are three main types of income in fixed income investments:

- Fixed-rate securities: These are those that have a fixed interest rate. It is the best option for those who want to know exactly how much they will receive at the end of the investment, when the bond matures.

- Fixed-rate securities: are usually linked to some market index, such as Selic or CDI.

• Hybrid securities: profitability is made up of a variable part and a fixed part, which is defined at the time of application.

In practice, changes in the Selic rate affect investment returns.

Post-fixed investments, for example, depend on the variation in the basic interest rate to determine the final value of the investment.

This applies to the Selic Treasury. Whenever the rate changes, the profitability of investments also follows the change.

The same applies to private securities, such as bank deposit certificates (CDB), real estate credit letters (LCI) and agribusiness credit letters (LCA).

Many of these investments usually pay a percentage of the (CDI) interbank deposit certificate, which follows the movement of the Selic rate.

There are also investments that are linked to inflation rates. But in this case, the relationship is indirect.

Variable income

Most variable income investments are not indexed by Selic or IPCA (Broad National Consumer Price Index).

However, changes in rates can impact the market. How so?

This is because with higher interest rates, investors are starting to become more interested in fixed income, as the risks involved are lower.

Equity assets and derivatives are generally priced based on supply and demand. This can cause prices to decline within equity securities.

However, when interest rates are lower, the opposite happens. This means that in these cases, investors start to become more interested in variable income.

Is it possible to invest in Selic?

The Selic rate is not an investment, but rather a market index.

But you can make investments that follow the performance of Selic, such as:

• Treasury Selic

• CDB that yields 100% of the CDI

• Real Estate Credit Letters (LCI) and Agribusiness Credit Letters (LCA) issued by banks linked to the CDI

Conclusion

Now you know the relationship between the Selic rate and investments.

When the rate falls, fixed income loses part of its income and variable income becomes more attractive.

But before making investments, don't just consider profitability, as your investor profile and the risks involved are also very important!