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Brazil:Outlook for Monetary and Exchange Rate Policies
Afonso Bevilaqua
November 2006
Brazil:Outlook for Monetary and Exchange Rate Policies
Afonso Bevilaqua
November 2006
2
Brazil: Outlook for Monetary and Exchange Rate Policies
External Sector
Inflation
3
Brazil: Outlook for Monetary and Exchange Rate Policies
Inflation
4
Inflation Targets
IPCA14
%
targetstolerance intervals
IPCA (consensus)12.5
0
2
4
6
8
10
12
9.3
1999 2000 2001 2002 2003 2004 2005 2006
8.97.7 7.6
6.0 5.7
3.1
4.1
2007
4.3
2008
5
IPCA Inflation
12.5
9.37.6
5.73.1
02468
101214
2002 2003 2004 2005 2006*
%
% p
.m.
1.1
avg. 2003:0.74% avg. 2004:
0.61% avg. 2005:0.46%
avg. 2006:0.23%
* Market Consensus
-0.3-0.10.10.30.50.70.9
1.31.51.71.92.12.3
Jan Jul Jan Jul Jan Jul Jan Jul Oct03 03 04 04 05 05 06 06 06
6
IPCA x Food Prices
2.5
%p.
m.
0.5 IPCA
food prices (IPCA)
2.0
1.5
1.0
0.0
-0.5
-1.0
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct03 03 03 03 04 04 04 04 05 05 05 05 06 06 06 06
7
Inflation Cores
3-month moving average1.8
exclusionsmoothed trimmed means
%
non-smoothed trimmed means1.3
0.8
0.3
-0.2Jan Jul Jan Jul Jan Jul Jan Jul Jan Oct02 02 03 03 04 04 05 05 06 06
8
Tradables x Non-Tradables
accumulated in 12 months1021
% %
tradables
non-tradables
18 9
158
127
96
6
53
0 4Jan02
Jul02
Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Oct06
9
IPCA: % of Items with Price Increases
88
polynomial trend
78
68%
58
48Jan Jul Jan Jul Jan Jul Jan Jul Jan Oct02 02 03 03 04 04 05 05 06 06
10
Wholesale Price Inflation (IPA)
6.3
14.7
-1.0
4.1
-4048
1216
2003 2004 2005 2006*
avg. 2004:1.15%
2.5
2.0 avg. 2003:0.51%
* Market consensus
%
avg. 2005:-0.08%
avg. 2006:0.34%
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0Jan Jun Nov Apr Sep Feb Jul Dec May Oct03 03 03 04 04 05 05 05 06 06
11
Industrial x Agricultural Wholesale Inflation
5.5 industry
%p.
m.
-0.5
0.5
1.5
agriculture4.5
3.5
2.5
-1.5
-2.5
-3.5Jan03
Jun03
Nov03
Apr04
Sep04
Feb05
Jul05
Dec05
May06
Oct06
12
Industrial Prices: Wholesale x Retail
3.0
%p.
m.
0.5
1.0
wholesale industrial prices(ex-fuel prices)
retail industrial prices (ex-fuel prices)
2.5
2.0
1.5
0.0
-0.5
-1.0Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Oct06
13
Interest Rate (Selic and 360-day Swap)
34
% p
.a.
* November 10
360-day swap31
28
Selic rate25
22
19
16
13Jan Jan Jan Jan Jan Jan Jan Nov*00 01 02 03 04 05 06 06
14
Real Interest Rate (360-day Swap)
20
25avg. 96/99:
18.5%
avg. 00/03:15.0%
40
35
30
avg. 06:9.7%%
avg. 04/05:11.5%
15
10 8.6
5Jan Nov*Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
0696 97 98 99 00 01 02 03 04 05 06
* November 10
15
Monetary Policy Surprisespe
rcen
tage
poi
nts
decision – market consensus(t-3)
-3-2-10123
Dec01
Jun02
Dec02
Jun03
Dec03
Jun04
Dec04
Jun05
Dec05
Oct06
Difference between interest rate decision and market consensuswith 1- and 3-month lags 8
7654
decision – market consensus(t-1)
* Shaded areas: cycles of interest rates rises
16
Monetary Policy Predictability: Forecast Monthly Average Deviation
1-month lag 3-month lag1.2 4.03.591.06
0.20
Average: 1.01
0.0
3.5
p.p.
Average: 0.27
0.0
0.6
1.0
3.0
0.82.5
2.0
1.50.4
1.051.0
0.23 0.690.2
0.13 0.50.10 0.07 0.18
Dec 01 up Oct 02 up to Sep 02 to May 03 to Aug 04
Jun 03 up Sep 04 up to Aug 05
Sep 05 up to Oct 06
Dec 01 up Oct 02 upto Sep 02 to May 03 to Aug 04
Jun 03 up Sep 04 upto Aug 05
Sep 05 upto Oct 06
17
IPCA in 12 Months%
18
market consensus
Oct: 3.27%
16
1412
108
64
20
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Nov03 03 04 04 05 05 06 06 07 07 07
18
2005-2007 Market Inflation Expectations
6.5
2006
2007
6.020055.5
5.0
4.5%
4.0
3.5
3.0
2.5
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Nov04 04 04 04 05 05 05 05 06 06 06 06
19
2006 Market Inflation Expectations:Quarterly Data
1.5
2005 20061Q 1.78 1.462Q 1.41 0.213Q 0.77 0.404Q 1.66 0.99
1T06
2T06
3T06
4T06
1.3
1.1
0.9
%
0.7
0.5
0.3
0.1
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov06 06 06 06 06 06 06 06 06 06 06
20
2006 IPCA Expectations re
lativ
e fr
eque
ncy
(%)
05
101520253035
656055
Nov 10 May 295045
Mar 640
2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3 5.5
21
2007 IPCA Expectations re
lativ
e fr
eque
ncy
(%)
-505
1015202530
3.5
Mar 6
May 29
6055504540 Nov 1035
3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3
22
IPCA Expectations and Target
15
12-month IPCA expectations
%
central target
upper limit
lower limit
12
9
6
3
0
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Nov
02 02 03 03 04 04 05 05 06 06 07 07 08 08 08
23
Expectations x IPCA
18
12-month accumulated IPCA (t+12)
%
12-month ahead IPCAinflation expectations
15
12
9
6
3
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Nov02 02 03 03 04 04 05 05 06 06 06
24
Average Real Earnings and Inflation Surprise
13
3-m
onth
mov
ing
aver
age,
R$
940
965
990
1015
1040
May02
Nov02
1140
IPC
A >
exp
ecta
tions
IPC
A <
11IPCA (–) IPCA expectations11159109071065
real earnings 5
3
1
expe
ctat
ions
-1
-3
May03
Nov03
May04
Nov04
May05
Nov May Sep-5
05 06 06
25
Brazil: Outlook for Monetary and Exchange Rate Policies
External Sector
26
Nominal Exchange Rate
4.0
R$/
US$
2.0
2.5
Nov 102.15
3.5
3.0
1.5
1.0
Jan Jan Jan Jan Jan Jan Jan Jan Jan98 99 00 01 02 03 04 05 06
27
Real Exchange Rate
basket of 15 currencies180
Jun
94=1
00
100
120
160
140
Average100.4
100.480
60Jan Jan Jan Jan Jan Jan Jan Jan Jan Sep88 90 92 94 96 98 00 02 04 06
28
Real Exchange Rate x Commodities Prices
145 165
real exchange rate
commodities prices index(ex-oil)135 155
125 145
Jun
94=1
00
115
125
135
1995
=100
95
105
115
85 105
75 95Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Sep06
29
Current Account Balance
2014.2 11.9*
US$
bill
ion
-20
-10
* Forecast
102.5*
0
-30
-33.4-40
20071996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
30
Trade BalanceU
S$ b
illio
n
4550556065707580859095
100105110115120125130
Jan99
135 135.112-month accumulated
12-monthsurplus:
US$46.3 bi
88.7
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Oct06
31
Market Expectations for the Exchange Rate in Selected Months
3.4
3.2 Jun 04
Dec 043.0
R$/
US$
2.4
2.6
2.8 Jun 05
Dec 05Jun 06
Nov 062.2
2.0
Dec Jun Dec Jun Dec Jun Dec
04 05 05 06 06 07 07
32
12-Month Ahead Market Expectations for Exchange Rate and Trade Balance
3.844
US$
bill
ion
20
24
28
R$/
US$
2.8
3.0
Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Jul06
nominal exchange rate
trade balance3.640
3.436
3.232
2.6
16 2.4
12 2.2
Nov06
33
Market Expectations for Trade Balance
50200646 2005
US$
bill
ion
26
30
34
200742
38
22
18
Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Nov04 04 04 05 05 05 05 06 06 06 06
34
Foreign Exchange FlowsU
S$ b
illio
n
-20
0
Trade Financial
+US$ 2.4 bi60
-US$ 7.7 bi
+US$ 15.1 bi
-40
20
40
2004 2005
+US$ 19.0 bi
Jan-Oct 05 Jan-Oct 06-30-25-20-15-10-505
1015202530354045
35
BCB’s Acquisitions in the FX MarketU
S$ b
illio
n
0
5
10
24.925
21.5
20
15
5.32.3 1.6
-5
-7.2-10 -9.120022000 2001 2003 2004 2005 2006
(Jan-Sep)
36
BCB’s Accumulated Acquisitions in the FX Market as of Jan 2004
51.7
US$
bill
ion
1216202428
4852
048
32364044
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Sep04 04 04 04 05 05 05 05 06 06 06
37
International Reserves (ex-IMF Loans)
Nov 10:US$79.8 bi
US$
bill
ion
3035404550556065707580
152025
Jan99
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Nov06
38
External Debt
total external debt net external debt250 200
4Q04:201.4
4Q04:135.7
3Q06:73.2
1Q03:165.2
180230 3Q03:
219.7 160
US$
bill
ion 210 140
120190
100170
803Q06:160.8
601501Q00
1Q01
1Q02
1Q03
1Q04
1Q05
3Q06
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
3Q06
39
Net External Debt/Exports
to 0.6* from 3.1 3,1
2,6
2,1
1,6
1,1
0,6
0,1
2000 2001 2002 2003 2004 2005 Sep06
* Record low since the start of the series in 1970.
40
Net External Debt/GDP
to 8.3%* from 35.9% 36
30
24
%
18
12
6
2000 2001 2002 2003 2004 2005 Sep06
* Record low since the start of the series in 1970.
41
Accumulated Reduction in FX-Linked Domestic Debt as of Jan 2003
80 71.8
US$
bill
lion
10
20
30
70
60
50
40
0
-10Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Sep06
42
basi
s po
ints
Impact of a 1% FX Change on Debt/GDP Ratio
5
10
15
35
30
25
20
0
-3.1-5Jan Jan Jan Jan Jan Jan Jan Sep00 01 02 03 04 05 06 06
43
Brazil Risk (Embi+)ba
sis
poin
ts
100
600
1100
1600
2100
2600
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Nov 10221
44
Sovereign Spreads
buy-backannouncement
call exercise of Bradies
announcement
IMF pre-paymentannouncement
FOMC meetingMay 10
500
basi
s po
ints
100
200
300
400
0Jan Mar May Aug Oct Jan Mar May Aug Nov05 05 05 05 05 06 06 06 06 06
DifferenceBrazil Emerging Countries ex-BR & ARG
45
Brazil:Outlook for Monetary and Exchange Rate Policies
Afonso Bevilaqua
November 2006
Brazil:Outlook for Monetary and Exchange Rate Policies
Afonso Bevilaqua
November 2006