Central Banking in Emerging Markets

Transcription

1 Central Banking in Emerging Markets International Center for Monetary and Banking Studies () Governor of the Central Bank of Brazil Ilan Goldfajn January 15, 2019

2 Monetary policy is challenging in Emerging Markets (EME) Institutions are still under construction o o Fiscal policy is often under scrutiny and stress Central bank needs to constantly enhance credibility DO BRASIL 2

3 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 DO BRASIL 3

4 0,35 0,30 0,25 0,20 0,31 Effects: higher FX volatility Average exchange rate volatility 2003 Q Q3 0,15 0,10 0,12 0,05 0,00 AEs EMEs Data source: International Financial Statistics, IMF (quarterly data). Obs.: coefficient of variation (standard deviation/average). DO BRASIL 4

5 5,0 4,0 Average inflation 4,36 5,0 4,0 Inflation volatility Effects: higher inflation and inflation volatility Average inflation (% a.a.) and inflation volatility (average of standard deviation) 2003 Q Q3 3,0 2,0 1,0 1,52 3,0 2,0 1,0 0,99 2,27 0,0 AEs EMEs 0,0 AEs EMEs Data source: International Financial Statistics, IMF (quarterly data). Obs.:: CPI, percentage change, corresponding period previous year, percent. DO BRASIL 5

6 3,50 3,00 2,50 2,00 1,50 1,00 0,50 0,00 1,87 AEs 2,97 EMEs Effects: higher output volatility Output growth volatility (average of standard deviation) 2003 Q Q3 Data source: International Financial Statistics, IMF (quarterly data). DO BRASIL 6 Note: Real GDP seasonally adjusted, percentage change, corresponding period previous year, percent.

7 Current risks for monetary policy in EMEs Current risks for EMEs Risk aversion in global financial markets Fear of global deceleration Uncertainties related to trade disputes Normalization of interest rates in some advanced economies DO BRASIL 7

8 The recent shocks have affected each country according to its particular characteristics and fundamentals. Important factors for market reactions: Global shocks, local effects o o o External conditions (current account position, stock of international reserves, sensitivity to trade tensions, level of foreign corporate debt) De facto autonomy of the central bank Existence of fiscal and monetary room for countercyclical policies (low level of inflation, anchored inflation expectations) DO BRASIL 8

9 Japanese Yen Mexico Peso Swiss Franc Euro Chinese Renminbi Sterling Pound Canadian Dollar Chilean Peso South Africa Rand Brazilian Real Russian Rubble Turkish Lira Argentina Peso -50,6-27,9-1,0-4,7-5,4-6,0-7,8-11,3-14,2-14,5-17,1 0,0 2,2 Changes in FX rates 2018 FX change against USD (%) EME AE Data source: Bloomberg DO BRASIL 9 Obs: Percentual change in the amount of U.S. dollars needed to buy one unit of foreign currency.

10 FX volatility increased 2018 Exchange rates indexes (01/01/2018=100) jan 18 mar 18 mai 18 jul 18 set 18 nov 18 ARG peso TKY lira BRZ real RUS rubble CHI peso Data source: Bloomberg DO BRASIL 10

11 5 35 Policy rates increased Changes since May/18 (p.p.) 3 2 1, ,75 0,5 0,5 0,25 0,25 0 Brazil Chile S. Africa India Russia Mexico Indonesia TKY (left) ARG (left) Data source: Bloomberg DO BRASIL 11

12 How should EMEs react? 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. DO BRASIL 12

13 Reaction to shocks: Keep the framework Monetary Policy in Brazil Brazil: Focus on the inflation-targeting framework. In case of shocks that lead to changes in relative prices, monetary policy focuses on their secondround effects. Monetary policy should not react to stabilize exchange rate per se. DO BRASIL 13

14 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 DO BRASIL 14

15 jan/00 out/00 jul/01 abr/02 jan/03 out/03 jul/04 abr/05 jan/06 out/06 jul/07 abr/08 jan/09 out/09 jul/10 abr/11 jan/12 out/12 jul/13 abr/14 jan/15 out/15 jul/16 abr/17 jan/18 out/18 6 Brazil: buffers Current account and net foreign investment flow Current account deficit/gdp FDI/GDP Source: BCB / IBGE DO BRASIL 15

16 Fiscal reforms 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. DO BRASIL 16

17 % ,1 Anchoring inflation expectations Inflation expectations in twelve months close to the target ,0 3,75 3,7 2 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 Source: BCB / IBGE *Implied inflation expectations in inflation indexed bonds (NTN-B). DO BRASIL 17 **Implied inflation expectations in CPI futures (DAP).

18 50 Nov/ Policy rate in a downward trend Declining trend in the long run (% a.a.) jan 96 set 99 mai 03 jan 07 set 10 mai 14 jan 18 Dec/ Source: BC Obs. : From 04/01/1996 to 03/04/1999 Effective Selic (policy rate) DO BRASIL De 03/05/1999 até 12/18/2018 Target for the policy rate 18

19 Feb/03 17,7 Real interest rates declining Ex-ante real interest rates (% p.a.) 8 4 Dec/ set 02 nov 05 jan 09 mar 12 mai 15 jul 18 Source: Bloomberg The ex-ante real interest rate is derived from the Brazil CPI IPCA Median Smooth DO BRASIL and the BRL SWAP PRE-DI 1 Year rate 19

20 Mar-00 May-01 Jul-02 Sep-03 Nov-04 Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11 Jan-13 Mar-14 May-15 Jul-16 Sep-17 Nov-18 Index, seasonally adjusted (1995=100) Economic recovery % % GDP Source: IBGE and BCB - Index number, seasonally adjusted (1995=100) DO BRASIL - Projections for 2018 and 2019, December 2018 Inflation Report 20

21 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 DO BRASIL 21

22 THANK YOU!