Have you ever heard about the Central Bank of Brazil? It is the main authority responsible for the country’s financial market infrastructure. However, knowing how it works and deeply understanding its core functions is a great advantage for those who are already doing or are willing to do business in Brazil. Here you will find out more about the Brazilian Central Bank, as well as other infos such Brazil’s interest rate, exchange rates policy and the monetary policy in general.
What is the Brazilian Central Bank?
Just like any other central bank from other nations, the Central Bank of Brazil - in Portuguese: Banco Central do Brasil (BCB or BACEN) - is the main institution responsible for the country’s financial infrastructure. According to the BCB’s official website, its mission is:
“To ensure the stability of the currency purchasing power, to foster a sound, efficient and competitive financial system, and to promote the economic well-being of society.”
What are the core functions of the Central Bank of Brazil?
The BCB, is similar, for example, to the FED (Federal Reserve System) on United States and the Central Bank of the Republic of China. Generally speaking, they all have the goal to ensure the purchasing power’s stability of the domestic currency, as well as authorize and supervise other institutions in regards to the process and settlements of fund transfers, foreign exchange, financial assets and securities operations. These structures together are commonly known as financial market infrastructure.
The core functions of central banks can vary depending on how you interpret them. But, for the BCB, they are the following ones:
- Monopolize the notes issuance:
Only the BCB can control the money supply in Brazil. Although it is not the BCB’s function to actually print banknotes and produce coins, it is responsible for ordering them. How does that happen? The BCB orders the Brazil’s Mint (CMB) to produce the money according to a contract between both institutions.
- Be the government’s bank:
The BCB holds the Brazilian government’s most important accounts, while receiving money and paying on the government’s behalf. The BCB is also the holder and the investment manager of Brazil’s international reserves. Besides serving as an adviser whenever needed, it has defined obligations and provides several banking services to the government.
- Be the bankers’ bank:
By acting as a bank of central clearance, controlling transfers and settlements, the BCB can be called the banker’s bank. It is the only responsible for maintaining the accounts for the deposit of the voluntary and compulsory reserves of the financial system (the Banking Reserve account and the Settlement Account). More so, it acts as a lender of last resort, which means it extends loans to commercial banks when all other sources of raising funds are practically closed.
- Supervise the financial system:
The BCB is responsible for meeting the needs of the consumers and the Brazilian economy while fostering financial market development. It is, moreover, the authority that regulates and monitors the banking and non-banking entities in Brazil.
- Execute the monetary policy:
It is the BCB who implements the monetary policy in Brazil and this function is what defines any central bank of any country in its broad sense. The monetary policy affects the money supply, controls funds flow and credit creation through three traditional instruments of any central bank: reserve requirements, rediscount, and open market operations.
- Execute the exchange rate policy and hold the international reserves:
The BCB manages Brazil’s international reserves, which includes holding assets in gold, securities and foreign currencies for transactions in the exchange markets. Besides that, it determines the exchange rate policy and regime adopted in the country.
Basically, there are two regimes: fixed exchange rate (when a fixed price is set by the monetary authority, which is responsible for sustaining it) and floating exchange rate (where the price varies according to the market agents that demand and offer foreign currency and has no interference from the monetary authority, except in some cases). There are other types of regimes under each of these two as well, but we won’t discuss them here.
Brazil currently adopts the floating exchange rate, although sometimes the BCB interferes to control the price of the the Brazilian currency, which is called Real (BRL). Many other countries adopts floating exchange rates too, such as: Mexico, Australia, Canada, Chile and the UK.
Brazil’s interest rate - Selic
Many people search about Brazil’s Central Bank interest rate. First of all, it is important to notice that the interest rate in Brazil is defined along with what is called Selic (Special System for Settlement and Custody) rate.
The Selic is the central depository for most securities issued by the National Treasury. Furthermore, it is BCB's responsibility for processing the issuance, redemption, interest payments and custody of these securities. All securities are bookentry and other complementary modules administration are also managed by the BCB.
Now, when we talk about Selic rate, we are referring to the basic interest rate of the Brazilian economy which is defined by the Monetary Policy Committee (Copom): a team formed by the BCB’s president and directors. The committee meets every 42 days to set the rate, which is valid until the next meeting. The Selic rate is used as a reference for daily financing rates secured by government bonds and calculated by the Special System for Settlement and Custody (Selic).
You can check the current Selic rate here.