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The Brazilian Economy
Governor of the Central Bank of Brazil
Ilan Goldfajn
April, 2018
BANCO CENTRAL
DO BRASIL
1
BANCO CENTRAL
DO BRASIL
THREE POSITIVE PHENOMENA IN THE BRAZILIAN ECONOMY
- Lower inflation
- Lower interest rates
- Economic recovery
2
Lower inflation and interest rates, with economic recovery
BANCO CENTRAL
DO BRASIL
Dec 15
10.67Aug 16
8.97
Aug 17
2.46
Mar 18
2.68
Dec 18
3.80
Dec 19
4.10
0
2
4
6
8
10
12Se
p 1
5
Dec
15
Mar
16
Jun
16
Sep
16
Dec
16
Mar
17
Jun
17
Sep
17
Dec
17
Mar
18
Jun
18
Sep
18
Dec
18
Mar
19
Jun
19
Sep
19
Dec
19
%
3
12-month inflation (IPCA)
Conditional forecasts*
*Considering interest and exchange rates from the Focus survey (Inflation Report, 2018/March).Source: BCB / IBGE
IPCA is converging
to the targets
BANCO CENTRAL
DO BRASIL
8.1
5.0
3.6
2
3
4
5
6
7
8
9
10
11
Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 18
%
Implied expectations (01/29/2016)* Implied expectations (07/29/2016)*
Implied expectations (04/11/2018)** IPCA (historical)
4
*Implied inflation expectations in inflation-indexed bonds (NTN-B).**Implied inflation expectations in CPI futures (DAP).Source: BCB / IBGE
12-month inflation (IPCA): historical and implied expectations
Anchoring expectations was
fundamental
BANCO CENTRAL
DO BRASIL
5
Selic rate
SELIC rate at historical lows
14.25
6.505
6
7
8
9
10
11
12
13
14
15
Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18
% p
.a.
BANCO CENTRAL
DO BRASIL
160
165
170
175Se
p 1
4
Dec
14
Mar
15
Jun
15
Sep
15
Dec
15
Mar
16
Jun
16
Sep
16
Dec
16
Mar
17
Jun
17
Sep
17
Dec
17
Mar
18
Jun
18
Sep
18
Dec
18
Mar
19
Jun
19
seas
on
ally
ad
just
ed in
dex
(1
99
5 =
10
0)
2018
+2.8%
2019
+3.0%
6
Accumulated decrease*
-7.8%
Real GDP
In yellow, market expectations (Focus survey, 04/06/2018).*Growth between the fourth quarter of 2014 and the fourth quarter of 2016.Source: BCB / IBGE
GradualGDP recovery
BANCO CENTRAL
DO BRASIL
Economic Outlook
1. The global outlook has been favorable, as economies grow
and interest rates are low worldwide
This has so far contributed to support risk appetite towards
emerging economies
2. The set of indicators of economic activity shows consistent
recovery of the Brazilian economy
3. Low inflation in Brazil, converging to the targets
7
Low inflation with economic
recovery
BANCO CENTRAL
DO BRASIL
8
* Seasonal range: seasonal pattern compatible with the inflation target rangeSource: IBGE / FGV / BCB
0.1
0.3
0.5
0.7
0.9
Mar
Ap
r
May Jun
Jul
Au
g
Sep
Oct
No
v
Dec Jan
Feb
% p
.m.
Core IPCA – Smoothed trimmed mean
0.1
0.3
0.5
0.7
0.9
Mar
Ap
r
May Jun
Jul
Au
g
Sep
Oct
No
v
Dec Jan
Feb
% p
.m.
Core IPCA – Double-weighted
Seasonal range (3.0% - 6.0%) 2016/2017 2017/2018
Low core inflation
BANCO CENTRAL
DO BRASIL
9
* Seasonal range: seasonal pattern compatible with the inflation target rangeSource: IBGE / FGV / BCB
0.1
0.3
0.5
0.7
0.9
Mar
Ap
r
May Jun
Jul
Au
g
Sep
Oct
No
v
Dec Jan
Feb
% p
.m.
Core IPCA – Trimmed mean
0.1
0.3
0.5
0.7
0.9
Mar
Ap
r
May Jun
Jul
Au
g
Sep
Oct
No
v
Dec Jan
Feb
% p
.m.
Core IPCA – Underlying services
Seasonal range (3.0% - 6.0%) 2016/2017 2017/2018
Low core inflation
BANCO CENTRAL
DO BRASIL
Monetary Policy
1. Risks around the baseline scenario remain in both directions:
Downside risk for inflation: (i) possible propagation through
inertial mechanisms of low inflation levels
Upside risk for inflation: (ii) frustration of expectations regarding
the continuation of reforms and adjustments; and (iii) a reversal
of the current benign global outlook for emerging economies
2. Monetary policy has the flexibility to react to risks in both
directions
10
Flexibility to react to risks in both
directions
BANCO CENTRAL
DO BRASIL
Monetary Policy
3. Copom – current assessment (baseline scenario):
Next meeting: the Copom views an additional moderatemonetary easing as appropriate and judges that this additionalstimulus mitigates the risk of delayed convergence of inflation
Beyond the next meeting: the Copom deems appropriate tointerrupt the monetary easing process, with the aim ofevaluating next steps
4. The Copom emphasizes that the next steps in the conduct ofmonetary policy will continue to depend on:
Evolution of economic activity
Balance of risks
Possible reassessments of the extension of the cycle
Inflation projections and expectations
11
Copom baseline scenario
BANCO CENTRAL
DO BRASIL
12
Monetary Policy
5. The Copom understands that monetary policy has to
balance two dimensions
Inflation convergence to the targets at a proper pace
Endurance of a low inflation environment, even in the
event of adverse shocks
Monetary policy has to balance
two dimensions
BANCO CENTRAL
DO BRASIL
13*Non-earmarked market
Expansionary Monetary Policy Cyclesvariations from the start of the cycle (t0)
-12
-10
-8
-6
-4
-2
0
t-16 t-12 t-8 t-4 t0 t+4 t+8 t+12 t+16
Selic rate – pp
-25
-20
-15
-10
-5
0
5
t-16 t-8 t0 t+8 t+16
Credit interest rate* – pp
-15
-5
5
15
25
35
t-16 t-8 t0 t+8 t+16
New credit concessions* - %
R$ bi
178
218
254
323
246
% p.a.
26.3
19.8
13.7
12.4
14.2
% p.a.
57.8
47.4
43.3
38.1
53.3
1st cycle (may/03) 2
nd cycle (aug/05) 3
rd cycle (dec/08) 4
th cycle (aug/11) 5
th cycle (sep/16)
Current monetary easing cycle has a standard impact
BANCO CENTRAL
DO BRASIL
4
8
12
16
20
Dec 2015 Mar2016
Jun Sep Dec Mar2017
Jun Sep Dec
Cost of financing (% p.a.)
Corporate bonds (aggregate) Credit with BNDES funding
14Source: BCB and Cemec/Fipe
Capital market and external funding expanding
0510152025303540
0
20
40
60
80
100
2015 2016 2017
Sources of corporate financing (R$ bi)
Corporate bonds Equity (RHS) Promissory note (RHS)
Increasing importance of capital markets
90% growth of capital markets funding in 2017
BANCO CENTRAL
DO BRASIL
Final Remarks
• Economic Outlook:• Consistent economic activity recovery with the IPCA converging to
the inflation targets, but there are risks
• The global outlook is benign, but this scenario will not last forever
• Significant progress in adjustments and reforms, with severalstructural measures already approved and multiple initiativesin progress
• Brazil must continue along that path in order to sustain a lowinflation, a low structural interest rate and the economicrecovery
15
Brazil must continue on the path of reforms