central banking in emerging markets · institutions are still “underconstruction” o fiscal...

Central Banking in Emerging Markets

International Center for Monetary and Banking Studies (ICMB)

Governor of the Central Bank of BrazilIlan Goldfajn

January 15, 2019

Institutions are still “under construction”

o Fiscal policy is often under scrutiny and stress

o Central bank needs to constantly enhance credibility

BANCO CENTRALDO BRASIL 2

ICMB

Monetary policy is challenging in Emerging Markets (EME)

Higher macroeconomic instability in comparison to AEs

o EMEs are more subject to “sudden stops”

o Balance sheet effects

o Reduced liquidity may produce contagion

o Shocks of greater magnitude


Monetary policy is challenging in Emerging Markets (EME)

ICMB


0,12

0,31

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

AEs EMEs

Average exchange rate volatility 2003 Q1 – 2018 Q3

Data source: International Financial Statistics, IMF (quarterly data).

Obs.: coefficient of variation (standard deviation/average).

Effects: higher FXvolatility

ICMB

Effects: higher inflation and inflation volatility


Average inflation (% a.a.) and inflation volatility (average of standard deviation)

2003 Q1 – 2018 Q3


Obs.:: CPI, percentage change, corresponding period previous year, percent.

1,52

4,36

0,0

1,0

2,0

3,0

4,0

5,0

AEs EMEs

0,99

2,27

0,0

1,0

2,0

3,0

4,0

5,0

AEs EMEs

Average inflation Inflation volatility

ICMB

Effects: higher outputvolatility


Output growth volatility (average of standard deviation)

2003 Q1 – 2018 Q3


Note: Real GDP seasonally adjusted , percentage change, corresponding

period previous year, percent.

1,87

2,97

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

AEs EMEs

ICMB


Current risks for EMEs

Current risks for monetary policy in EMEs

• Risk aversion in global financial markets

Fear of global deceleration

• Uncertainties related to trade disputes

• Normalization of interest rates in some advanced economies

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The recent shocks have affected each country according to its particular characteristics and fundamentals.

Important factors for market reactions:

o External conditions (current account position, stock of international reserves, sensitivity to trade

tensions, level of foreign corporate debt)

o De facto autonomy of the central bank

o Existence of fiscal and monetary room for countercyclical policies (low level of inflation, anchored

inflation expectations)

Global shocks, local effects

ICMB


Data source: Bloomberg

Obs: Percentual change in the amount of U.S. dollars needed to buy one

unit of foreign currency.

EME AE

Changes in FX rates

-50,6

-27,9

-17,1

-14,5

-14,2

-11,3

-7,8

-6,0

-5,4

-4,7

-1,0

0,0

2,2

Argentina Peso

Turkish Lira

Russian Rubble

Brazilian Real

South Africa Rand

Chilean Peso

Canadian Dollar

Sterling Pound

Chinese Renminbi

Euro

Swiss Franc

Mexico Peso

Japanese Yen

2018FX change against USD (%)

ICMB


ARG peso TKY lira BRZ real RUS rubble CHI peso


FX volatility increased

80

100

120

140

160

180

200

220

jan 18 mar 18 mai 18 jul 18 set 18 nov 18

2018Exchange rates indexes

(01/01/2018=100)

ICMB


Changes since May/18 (p.p.)


Policy rates increased

00,25 0,25

0,5 0,50,75

1,75

16

29

0

5

10

15

20

25

30

35

0

1

2

3

4

5

Brazil Chile S. Africa India Russia Mexico Indonesia TKY (left) ARG (left)

ICMB


• EMEs governments should focus on continuing to advance structural reforms aimed at

improving the fundamentals and increasing the resilience of their economies

o Important initiatives: tax and fiscal reforms, opening for trade, financial reforms, and

initiatives aimed at increasing productivity and efficiency gains

• Buffers should help smoothing the adjustment path: especially international reserves,

current account, low inflation and anchored inflation expectations.

How should EMEs react?

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Reaction to shocks: Keep the framework

• Brazil:

• Focus on the inflation-targeting framework.

• In case of shocks that lead to changes in relative prices, monetary policy focuses on their second-

round effects.

• Monetary policy should not react to stabilize exchange rate per se.

Monetary Policy in Brazil

ICMB


Brazil: buffers

• Brazil has buffers to resist shocks:

• A robust balance of payments position

• A floating exchange rate regime

• Adequate levels of reserves

• Low current levels of inflation and well-anchored inflation expectations

ICMB


-2

-1

0

1

2

3

4

5

6ja

n/0

0

ou

t/0

0

jul/

01

abr/

02

jan

/03

ou

t/0

3

jul/

04

abr/

05

jan

/06

ou

t/0

6

jul/

07

abr/

08

jan

/09

ou

t/0

9

jul/

10

abr/

11

jan

/12

ou

t/1

2

jul/

13

abr/

14

jan

/15

ou

t/1

5

jul/

16

abr/

17

jan

/18

ou

t/1

8

Current account deficit/GDP FDI/GDP

Current account and net foreign investment flow

Source: BCB / IBGE

Brazil: buffers

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Brazil

• Made some progress in the reform agenda: spending ceiling, labor reform, education reform

and Agenda BC+

• Brazil needs to continue on the path of adjustments and reforms, especially the pension

system reform, in order to ensure confidence on fiscal sustainability and engender higher

growth.

Fiscal reforms

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Anchoring inflation expectations

Source: BCB / IBGE*Implied inflation expectations in inflation indexed bonds (NTN-B).**Implied inflation expectations in CPI futures (DAP).

8,1

5,0

3,75

3,7

2

3

4

5

6

7

8

9

10

11

dez 13 jun 14 dez 14 jun 15 dez 15 jun 16 dez 16 jun 17 dez 17 jun 18 dez 18 jun 19 dez 19

%

Break-even inflation (29/01/2016)* Break-even inflation (29/07/2016)*

Break-even inflation (01/09/2019)** Actual inflation CPI

Inflation expectations in twelve months close to the target

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Policy rate in a downward trend

Source: BCObs. : From 04/01/1996 to 03/04/1999 – Effective Selic (policy rate)

De 03/05/1999 até 12/18/2018 – Target for the policy rate

0

10

20

30

40

50

jan 96 set 99 mai 03 jan 07 set 10 mai 14 jan 18

Dec/18

6.5

Nov/97

46.4

Declining trend in the long run (% a.a.)

ICMB


Real interest rates declining

Dec/18

2.5

Source: BloombergThe ex-ante real interest rate is derived from the Brazil CPI IPCA Median Smooth and the BRL SWAP PRE-DI 1 Year rate

Ex-ante real interest rates (% p.a.)

0

4

8

12

16

20

set 02 nov 05 jan 09 mar 12 mai 15 jul 18

Feb/03

17,7

ICMB


Source: IBGE and BCB- Index number, seasonally adjusted (1995=100)- Projections for 2018 and 2019, December 2018 Inflation Report

100

110

120

130

140

150

160

170

Mar

-00

May

-01

Jul-

02

Sep

-03

No

v-0

4

Jan

-06

Mar

-07

May

-08

Jul-

09

Sep

-10

No

v-1

1

Jan

-13

Mar

-14

May

-15

Jul-

16

Sep

-17

No

v-1

8

Ind

ex, s

easo

nal

ly a

dju

sted

(1

99

5=1

00

)

2018

+1.3%

2019

+2.4%

Economicrecovery

GDP

ICMB


• Monetary policy in EMEs faces increased challenges

• Institutions “under construction” tend to amplify shocks, increasing volatilities in FX market, inflation and output growth;

• Important to stick to the IT framework, even in the event of stress. React if inflation targets are at risk.

• In the case of Brazil, the new direction of economic policy and the firm conduct of monetary policy led to some positive results:

• Inflation around the target and anchored expectations;• Interest rates at historically low levels;• Gradual process of recovery of the economy.

• EMEs governments should focus on continuing to advance structural reforms aimed at improving the fundamentals and increasing the resilience of their economies.

• Buffers should help smoothing the adjustment path.

Conclusions

ICMB

THANK YOU!

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