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Brazil: Economic and Monetary Outlook
Tiago Berriel
Deputy Governor for International Affairs and Corporate Risk Management
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1. International Context
2. Domestic Scenario
3. Monetary Policy
4. Agenda BC+
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1. International Context
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Positive outlook for central economies, despite recent monetary policy adjustments
Monetary policy re-pricing in central economies with limited impact on EMEs
Risk appetite for EMEs remains high:
– Global economy has strengthened over the past year
– Gradual and well-communicated adjustment in monetary policy by central banks in major
economies
– Resilient capital flows and asset prices
Main risks:
– Faster than expected MP tightening in AEs due to revision in expected inflation path
– Sustainability of current growth momentum
– Protectionism
Positive scenario and risk appetite for EMEs
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Expectations of global growth
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Up to Mar 16th
Source: Bloomberg
GDP Growth expectations
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Inflation
6
%%
%%
United States
China
Euro Zone
Japan
2017/2018/2019/2020: projection
Source: Bloomberg
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International Context
Source: Thomson Reuters Datastream
Yields 10-year Sovereign Bonds
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Risk appetite for EMEs
Source: BCB / Bloomberg / Reuters
*Average daily average of the daily measures from January 2003 to the current data
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Positive scenario for EMEs
Source: Bloomberg
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EME – Capital Flows
Source: Bloomberg
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2. Domestic Scenario
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Domestic Scenario
Brazil is recovering consistently
– Growth recovery
– Consumption growth, advanced deleveraging process of households and low inflation
A sustainable growth will demand recovery in investments and implementation
of reforms, notably those of a fiscal nature
Brazil is now less vulnerable to external shocks
– External accounts and international reserves
– Low inflation
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GDP quartelly growth (%)
Source: BCB
Economic activity has been recovering
In yellow, market expectations (Focus survey, April 4th, 2018).
*Growth between the fourth quarter of 2014 and the fourth quarter of 2016
GDP real growth (%)
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Retail sales
*Observed data
Source: IBGE, BCB.
Retail sales 2.8%
Broad retail sales 5.3%
12 months through Fev 18 /
12 months through Fev 17*
Retail sales indexes Retail sales and exports
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Household deleveraging
Source: BCB
Household indebtdness
(balance over income)
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Improvements in the labor market
Source: IBGE (PNADC)
Workforce Unemployment
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Payroll and Real Earnings
Source: IBGE
Payroll and real earnings
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Effective recovery of investment
Source: IBGE
Capital Goods ProductionGross Fixed Capital Formation (FBCF)
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Corporate financing
Source: BCB
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Economic agents confidence – entrepreneurs expectations
Source: FGV
Obs.: Positive response ratio – negative response ratio + 100
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Source: FGV
Industrial Capacity
Industrial Capacity UtilizationIndustrial Production (PMI)
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Robust External Accounts
Source: BCB / MDIC
From 1995 on, methodology according to BPM6
* BCB forecast
Currenct account and Foreign Direct Investment
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Robust External Accounts
Source: BCB / MDIC
US
$ b
illio
n, d
aily
International reserves
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3. Monetary Policy
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Consumer Price Inflation converging to the targets
Source: BCB, IBGE
*as of March 29th, up to Jun 19; **up to Jun 19
12-month inflation (IPCA)
*medians of Market expectationsh; ** IPCA expectation = target
12-month inflation (IPCA)
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*Up to Apr 6th
Sources: BCB / IBGE
Anchored market expectations
IPCA: historical and expectations Market expectations evolution for IPCA 2018-2022
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3.5
4.5
5.5
6.5
7.5
8.5
9.5
-4 -3 -2 -1 0 1 2 3 4 5 6
GDP in the next 12 months (% growth)
IPC
A in
th
en
ext
12 m
on
ths
(% c
ha
ng
e)
Market Expectations
20052006
2004
2007
2008
2009
2010
20112012
2013
2014
2015
2017
2016
2018
2003
Sources: BCB and IBGE.
GDP X IPCA, next 12 months
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Source: IBGE
Headline and Core Measures Broad IPCA - Diffusion Index
IPCA – Headline, Cores and Diffusion Index
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Underlying inflation measures
Sources: IBGE and BCB
Seasonal band: seasonal pattern compatible with inflation target
Underlying service inflation Underlying service inflation
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Underlying inflation measures
Sources: IBGE and BCB
Seasonal band: seasonal pattern compatible with inflation target
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Underlying inflation measures
Sources: IBGE and BCB
Seasonal band: seasonal pattern compatible with inflation target
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% p
.a.
Monetary Policy Interest rate (Selic Rate)
* 12-month pre-fixed interest rate (from the swap DI market) minus 12-months expected inflation (Focus survey)
Source: BCB, Bloomberg
Interest Rate Decline
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Is this cycle different?Variations from the start of the cycle (t0)
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Monetary Policy
Basic interest rate reduction by 0.25 percentage point, to at 6.5% p.y.
Baseline scenario involved risks in both directions:
– On the one hand, (i) the possible propagation, through inertial mechanisms of low
inflation levels, may lead to a lower-than-expected prospective inflation trajectory.
– On the other hand, (ii) frustration of expectations regarding the continuation of reforms
and necessary adjustments in the Brazilian economy may affect risk premia and increase
the path for inflation over the relevant horizon for the conduct of monetary policy; (iii)
this risk intensifies in the case of a reversal of the current benign global outlook for
emerging economies.
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Monetary Policy
Monetary Policy Committee’s perspective at this time (baseline scenario):
– For the next meeting: The Committee views an additional moderate monetary easing as appropriate and judges that this additional stimulus mitigates the risk of delayed convergence of inflation toward the targets.
– Beyond the next meeting: The Committee deems appropriate to interrupt the monetary easing process, with the aim of evaluating next steps, in light of the relevant horizon for monetary policy at that time.
The Committee emphasizes that the next steps in the conduct of monetary policy will continue to depend on:
– The evolution of economic activity
– The balance of risks
– Possible reassessments of the extension of the cycle
– Inflation projections and expectations
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Monetary Policy
The Monetary Policy Committee understands that monetary policy has to balance
two dimensions:
– Reacting to ensure that inflation converges to target at a proper pace
– Guaranteeing that the achievement of a low inflation environment endures, even
in the event of adverse shocks
The Committee reaffirms that monetary policy has the flexibility to react to risks in
both directions
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4. Agenda BC+
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- The main goal is to pursue a more efficient financial system, with more free market
credit, contributing to increase the power of monetary policy
- Based on four Pillars:
Agenda BC+: lower neutral rate and higher MoP Effectiveness
I. Increase financial citizenship
II. Increase financial system
efficiency
III. Improve legal framework
IV. Reduce cost of credit
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1. New funding rate for BNDES operations (TLP)
2. Deal with depositors on economic plans of the 1980s and 1990s
3. New legislation on enforcement tools
4. Centralized settlement of payment schemes
5. Improvement of collateral and guarantees electronic registration
6. Credit card – new rules for revolving credit lines, and legalization of price
differentiation among payment methods
7. Check – settlement period of one business day (T+1)
Tackling old problems
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TLP reform and its first impacts on capital markets
Source: BCB
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Constitutional Funds Brazil’s Constitutional Funds seek to contribute to the economic and social development of the Northeast,
North and Center-West regions.
Progress in expanding the interest rate reform beyond TLP, with rates based on market prices of government
securities
– Less discretionary in its definition, generating more transparency and predictability;
– Predictability of fiscal costs and increase in the transmission power of monetary policy;
– Contribution to the sustained fall in the structural interest rate of the economy;
– Ensuring that the funds promote the relative development of the regions benefiting from the use of the
CDR, in addition to ensuring lower rates than other more widely administered rates such as the TLP.
Provisional Measure 812, of December 2017, modernizes the calculation of the non-rural financial charges of
the Constitutional Funds, based on the TLP.
Next step: rural credit.
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1. Central Bank autonomy
2. Fostering competition among financial institutions
3. Relationship between the Central Bank and the Administrative Council for Economic Defense
4. Improvement of the positive credit bureau (Cadastro Positivo)
5. Bank interest rate spread (overdraft, reserve requirements, etc.)
6. Reduce the use of cash (incentive of debit card and technology in payment systems)
7. Voluntary deposits as an auxiliary monetary instrument
8. Relationship between the Central Bank and the National Treasury
Some initiatives in progress
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Thank you!
Tiago Berriel
Deputy Governor for International Affairs and Corporate Risk Management