Monetary Policy in Brazil Solange Gouva Research Department Brazil – Russia Dialogue: Economic Policy Challenges International policy workshop June 2012 1 Disclaimer The views expressed in this presentation are mine and not necessarily those of the Central Bank of Brazil.
2 Emerging Markets and the 2008/9 Financial Crisis “Inflation Targeting - First some facts:
During the Great Crisis of 2008-2009, EM showed more resilience than advanced economies. Now, EM are exiting the global crisis at a much faster pace than advanced economies. This reflects sizable policy support, favorable external conditions and solid macroeconomic fundamentals that proved helpful before, during and after the financial turmoil” Guilhermo Ortiz at the Conference:
“Macro and Growth Policies in the wake of the crisis” sponsored by IMF March 2012 3 Outline The National Financial System and the Central Bank of Brazil Macroeconomic Policy in Brazil: Historical Overview Macroeconomic Policy in Brazil: Current Set Up Inflation Targeting in Brazil IT Framework IT Performance Macroeconomic Fundamentals Social Development Final Remark 4 The National Financial System The National Financial System NATIONAL FINANCIAL SYSTEM National Council of Management Council National Monetary Private Insurance - of Complementary Council CMN - CNSP Pension CGPC - Securities and Central Bank of Exchange Brazil - BCB Comission CVM - Commodities Stock Exchange Other financial Financial Exchange Other financial and Futures intermediaries Institutions Brokers intermediaries Bovespa Exchange National Monetary Council (CMN) - The Minister of Finance, the Minister of Planning, Budget and Management and the Governor of the Central Bank of Brazil - Establishes the inflation target, prudential rules and credit policy - The Central Bank of Brazil is the financial supervisory authority Source: BCB The National Financial System Central Bank of Brazil Mission Ensure price stability and a solid and efficient financial system.
Monetary Financial Policy Regulation Financial Supervision Wide scope of Central Bank’s authority helps policy coordination Historical Background Macroeconomic Policy: Monthly Inflation Cruzado Plan 1980 1987 1990 2003 % Historical Background Macroeconomic Policy: Brazil up to Increasing inflation since mid-1970s Underdeveloped fiscal and monetary institutions Loose control on public expenditure Low transparency of institutions and policies GDP growth: high until 1970s; “lost decade” (1980s) External debt crisis in the 1980s Sequence of failed stabilization programs (e.g., “freezing” of financial assets in the banking system (1990); only temporary success) Historical Background Macroeconomic Policy - The Real Plan – July Previously announced.
Process of desindexation of the economy.
Favorable conditions: International reserves accumulation;
capital inflows; society “tired” of inflation Success: rapid and lasting inflation convergence to low levels Generated, for the first time in decades, a low inflation environment Historical Background Macroeconomic Policy – 1999 Crisis Unsustainable regime (Fiscal situation, External disequilibrium) Mexican, Asian and Russian crises (pressure on international reserves and domestic interest rates; sudden stop crisis ) Huge exchange rate depreciation (collapse of the managed exchange rate system) Nominal Exchange Rate Uncertainty about the economy 2,2,Fears of return to high inflation 1,1,1,1,0,R$ / US$ Jul-Jul-Jul-Jul-Jul-Jul-Jul-Jan-Jan-Jan-Jan-Jan-Jan- Overview Current Macroeconomic Policy Three pillars of the macroeconomic policy framework:
Inflation targeting Fiscal responsibility Exchange rate flexibility Enhanced macroeconomic fundamentals, combined with macro prudential policy and strong bank supervision resulted in:
Improved capacity to absorb internal and external shocks Macroeconomic and financial stability Sustainable growth Credit and capital market development Inflation Target Framework in Brazil Overview IT Framework in Brazil: Main Features Adopted in Brazil in June, Targets set by the government (National Monetary Council -CMN) Targets are announced in June of year t for calendar year t+ Inflation index: headline CPI (IPCA) – more credible Point target with a tolerance interval – inflation uncertainty If the target is not achieved (outside the tolerance interval):
Open-letter to the Minister of Finance Transparent Communication: Press release after MPC meetings, MPC Minutes and Inflation Report Overview IT Framework in Brazil: Why IT Increasing success in other countries:
In 2009, 27 central banks were considered fully fledged inflation targeters, and many others were in the process of establishing a full inflation-targeting framework.
To disinflate with better trade-off : the important role of IT as an anchor for inflation expectations.
IT brings more transparency and accountability.
By law the monetary authority is committed to price stability.
Overview IT Framework in Brazil: IT in practice Inflation targeting relies on good macroeconomic forecasts, more than any other monetary policy regime;
Good forecasting in this framework is expected to reduce the trade-off between inflation and output volatility;
Projection Models of the BCB Given the lag between monetary policy action and its effects on prices, inaccurate forecasts may delay the action and induce undesirable cycles.
“Essentially, all models are wrong, but some are useful.” (Statistician George E. P. Box) IT Framework in Brazil: The MPC decision-making process Outlook of Short-term projections Current economic situation the economy for key economic and near-term outlook variables Inflation nowcasting;
Analysis of forecasting’s Model-based expectations; balance of performance (Monitor);
Inflation risks; judgment Fan chart Projections MPC (Copom) Meeting and Decision Communication Open Market Communiqu, Minutes Liquidity at a level and Inflation Report consistent with Selic rate IT Framework in Brazil: Inflation expectations Play a key role in inflation forecasting;
Should remain anchored to the target (in the medium to long run);
Cannot be directly observed, alternatives:
Extracted from financial market data (market liquidity, risk premium...) Survey-based expectations:
used for inflation projections; (alternative to the model consistent setup) used in model estimation.(as an alternative to the rational expectations assumption) IT Framework in Brazil: Survey-based expectations Since 1999 (transition to the inflation targeting system);
Created to monitor market expectations and improve the inputs for the monetary policy decision-making process;
Daily survey of roughly 110 institutions;
Market expectations for inflation rates, GDP growth, industrial production growth, FX rate, interest rate, fiscal variables, and external sector;
Top 5 ranking to foster private sector forecasting expertise.
IT Framework in Brazil: Current setup Inflation target for 2011, 2012, 2013: 4.50% ± 2.00% Inflation in 2011 (IPCA): 6.50% Inflation projections (March Inflation Report):
2012 Baseline scenario 4.4% 5.2% Market expectations (*) 5.0% 5.5% (*) Median of inflation expectations as of June 15, IT Framework in Brazil : Taming Inflation Expectations CPI inflation rate (IPCA) 18% CPI inflation (%12m) 16% market expectations 14% central target 12% 10% 8% 6% 4% 2% 0% Jul-Jul-Jul-Jul-Jul-Jan-Jan-Jan-Jan-Oct-Oct-Oct-Oct-Apr-Apr-Apr-Apr-Apr-Economic Indicators Inflation – Convergence to Targets market expectation target (4.5%) market expectation: April 30th Sources: BCB / IBGE %, yoy IT Framework in Brazil: Survey-based expectations Dispersion of market expectations IPCA 2012 IPCA Source: Focus (May 7 2012) IT Performance in Brazil IT Performance (after 12 years):
Targets fulfilled in 10 years (including last 8 years) Confidence crisis: 2002-• Uncertainty about the future policy regime • Huge exchange rate depreciation • Stress test for inflation targeting Average inflation (2007-2011): 5.4% Evidence of targets anchoring expectations Construction of credibility: Agents’ perception of BCB committed to the IT regime Brazil Macroeconomic Fundamentals Macroeconomic Fundamentals Liquidity Buffers International Reserves Reserve Requirements Downward Trend of Public Debt Sound Financial System and Credit Market Stable and High Quality External Financing Downward Trend of Sovereign Risk Macroeconomic Fundamentals: Liquidity Buffers International Reserves (US$ bi.) Reserve Requirements (R$ bi.) 400 395 Source: BCB jun dez dez dez dez dez dez ago set jun dez dez dez dez dez dez Macroeconomic Fundamentals: Falling Public Debt Primary Surplus (% GDP) Public Debt (% GDP) 4,60,3,7 3,3,3,3,2 3,3,2 3,3,1 3,54,3,2,52,50,2,-24.7 p.p.
48,of GDP 2,47,2,45,1,42,1,39,38,0,36,35,0,0 Source: BCB 2012* 2012* Macroeconomic Fundamentals:Sound Financial System Main features:
Actual and regulatory capital requirement above international standards High level of liquidity ratios Macroeconomic Fundamentals: Sound Financial System Actual capital ratio of Brazilian Banks Well above minimum regulatory capital ratio requirement = 8% Well above minimum Basel capital ratio requirement = 11% Source: BCB * apr % Macroeconomic Fundamentals: Sound Financial System Liquid Assets / Short Run Liabilities Souce: IMF (2011) % India Brazil Japan China Russia Turkey Canada Mexico Greece Norway Portugal Belgium Sweden Australia South Korea Switzerland South Africa United States United Kingdom Macroeconomic Fundamentals: Sound Credit Market Moderate growth of credit volume Growth rate of 18% last 12 months New credit operations in 2012 are 10 % higher than in the same period of Recent data show:
Falling interest rates and spreads Macroeconomic Fundamentals: Sound Financial System Sustainable Credit Growth (50% of GDP) * Morgages Earmarked Credit Others Fonte: BCB % of GDP Macroeconomic Fundamentals: Sound Financial System Real Interest rate – Swap 360 days x Inflation expectations 12 months ahead Fonte: BCB General Overview Macroeconomic Fundamentals: Capital Market Primary Issues Source: CVM *June 2011 (12 months) R$ billion Macroeconomic Fundamentals: High Quality of External Financing Foreign Direct Investment (US$ bi.) FDI - CC deficit (% PIB) FDI em 2011 na AL • Brazil: US$ 67 bi.
• Mexico: US$ 19 bi.
• Chile: US$ 14 bi.
• Colombia: US$ 13 bi.
• Argentina: US$ 7 bi.
2 1 1 1 *apr 12 (12 months) Source: BCB Macroeconomic Fundamentals: Stable External financing (US$ bi.) Stable External Financing Others Exports Source: BCB jul oct jan fev abr jun aug sep nov dec mar Ma y Macroeconomic Fundamentals: Sovereign Risk (CDS) S&P: BBB Fitch: BBB Moodys: Baa2 ( ) 500 July 113 b.p.
(average) Source: Bloomberg basis points jan jan jan jan jan jan jan jan jan jan Brazil Social Development Social Development Both macroeconomic and inclusion policies have led to marked improvement in living conditions.
A significant share of low income groups joined the middle class.
Economic Indicators GDP per Capita US$ 12,Source: IBGE US$ Economic Indicators Unemployment Rate Jan 5.5% Source: IBGE % Social Mobility Social Classes *FGV forecast Source: FGV million of people Final Remark Closing Remark Virtuous Policies Interaction lower interest lower stronger rate and risk effect improved premium credibility inflation lower macroeconomic targeting inflation risk stability floating and falling net public lower international external debt external risk } } reserves primary falling public lower surplus debt fiscal risk Thank you! Спасибо! Economic Indicators Exports in Composition Destination * excluded Argentina ** excluded China and Middle East Source: MDIC *** excluded Germany
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