Alexandre Tombini Governor Banco Central do Brasil
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1 Alexandre Tombini Governor Banco Central do Brasil October 2013 Shaping Central Banking’s Institutions in the New Paradigm 3 rd SEACEN-CEMLA Conference
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Shaping Central Banking’s Institutions in the New Paradigm. Alexandre Tombini Governor Banco Central do Brasil. 3 rd SEACEN-CEMLA Conference. October 2013. Outline. Pre and Post-Crisis Views on Central Banking. Main Open Questions. Brazil: Policy in the Post-Crisis Period. - PowerPoint PPT Presentation
Transcript of Alexandre Tombini Governor Banco Central do Brasil
1
Alexandre TombiniGovernorBanco Central do Brasil
October 2013
Shaping Central Banking’s Institutions in the New Paradigm
3rd SEACEN-CEMLA Conference
2
Outline
• Pre and Post-Crisis Views on Central Banking
• Main Open Questions
• Brazil: Policy in the Post-Crisis Period
3
Initial remarks
• The global financial crisis led to a reevaluation of central banking practices. Some initial conclusions can already be drawn
• There is still no consensus on the implications for monetary and macroprudential policy frameworks. I will lay out our pragmatic views on this issue
• These views are reflected in Brazil’s monetary and macroprudential policies in the post-crisis period
4
Pre-crisis view: full separation of roles
Monetary Policy (MP) Prudential Regulation (PR)
Price Stability
(PS)
Financial Stability
(FS)
Price stability assures macroeconomic stability
Instruments and their impacts well-understood
Sound individual institutions assure financial stability
No interaction: clean, not lean against asset prices
5
Post-crisis view: initial observations
• Price stability insufficient to assure macroeconomic stability
• Microprudential regulation proved procyclical
• Prudential regulation must take systemic view
• Rekindled debate on optimal coordination of monetary and prudential policy
6
Central banks and financial stability
• Advantages of dual mandate for central banks:o Financial market and macroeconomic intelligence useful for
macroprudential policyo Easier information-sharing and coordination during a crisis
• Central banks have gained (or increased the relative importance of) financial stability mandates
• In Brazil (and in other emerging markets), financial stability mandate even before crisiso Created financial stability committee within Banko Adopted “twin peaks” supervisory modelo Improved credit and trade data repositories
7
Optimal policy coordination
• No consensus
• Pragmatic view: 2 goals, 2 instruments
o Monetary policy → price stability
• But do need to take into account interactions between instruments and goals
o Macroprudential policy → financial stability
8
Monetary policy: IT framework still optimal
• Monetary policy focus should continue to be price stability: vertical long-run Phillips curve
• Post-crisis, major central banks adopted elements of the IT framework (US, Japan)
• Projection models need to incorporate financial sector more deeply
• Transparency and simplicity (of target) favor accountability
• Short-run: has flexibility to absorb shocks
9
Post-crisis view
Monetary Policy (MP) Prudential Regulation (PR)
Price Stability
(PS)
Financial Stability
(FS)
Price stability insufficient for macroeconomic stability
Need more detailed financial sector information in
projection models
Systemic orientationNo consensus, but my view is two instruments for two
targets
Need to consider interactions between policies
Financial stability precondition for macroeconomic stability
Need to consider interactions between policies
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• Intense, volatile capital flows which could lead to excessive credit expansion and asset price distortions
Brazil: policy in the post-crisis period
• Macroprudential policies targeting both credit markets and capital flows directly. Helped reduce short-term, risky flows and moderate credit growth to sustainable levels
• UMP exit: Brazil is removing risk by offering foreign exchange hedge
• Goal of monetary policy continues to be price stability
11Source: BCB
FX flows in the post-crisis period
Ap
r 0
7
Au
g 0
7
De
c 0
7
Ap
r 0
8
Au
g 0
8
De
c 0
8
Ap
r 0
9
Au
g 0
9
De
c 0
9
Ap
r 1
0
Au
g 1
0
De
c 1
0
Ap
r 1
1
Au
g 1
1
De
c 1
1
Ap
r 1
2
Au
g 1
2
De
c 1
2
Ap
r 1
3
Au
g 1
3
-50
0
50
100
150
200
Foreign Direct Investment Equities Others Total
US
$ b
illio
n (
12
mo
nth
s)
US$177 billionAug 2011
US$111 billionAug 2013
12Source: BCB
FX flows rebalance
De
c 0
8
Ap
r 0
9
Au
g 0
9
De
c 0
9
Ap
r 1
0
Au
g 1
0
De
c 1
0
Ap
r 1
1
Au
g 1
1
De
c 1
1
Ap
r 1
2
Au
g 1
2
De
c 1
2
Ap
r 1
3
-20,000
0
20,000
40,000
60,000
80,000FDI X Portfolio
FDI Portfolio
US
$ b
illio
n (
12
Mo
nth
s)
De
c 0
8
Ap
r 0
9
Au
g 0
9
De
c 0
9
Ap
r 1
0
Au
g 1
0
De
c 1
0
Ap
r 1
1
Au
g 1
1
De
c 1
1
Ap
r 1
2
Au
g 1
2
De
c 1
2
Ap
r 1
3
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
Short Term Long Term
US
D b
illio
n (
12
Mo
nth
s)
Foreign Bonds and Loans
March 2011 – Fi-nancial transac-tion tax on FX
loans and bonds up to one year
13Source: BCB
Credit growth slows to sustainable paceD
ec
09
Ap
r 1
0
Au
g 1
0
De
c 1
0
Ap
r 1
1
Au
g 1
1
De
c 1
1
Ap
r 1
2
Au
g 1
2
De
c 1
2
750,000.0
850,000.0
950,000.0
1,050,000.0
1,150,000.0
1,250,000.0
1,350,000.0
Da
ily a
vera
ge
(R$
bill
ion
)
New Lending, Auto and Personal Credit
December 2010 - Increased capital requirements for specific consumer loan operations with long
maturities and high LTV ratios
De
c 0
9
Ap
r 1
0
Au
g 1
0
De
c 1
0
Ap
r 1
1
Au
g 1
1
De
c 1
1
Ap
r 1
2
Au
g 1
2
De
c 1
2
Ap
r 1
3
14
15
16
17
18
19
20
21
22
Total Outstanding Credit Growth
% Y
oY
14
• Federal Reserve signaling about tapering asset purchases led to global EME sell-off, impacting asset prices
• The program resulted in significantly lower FX volatility and risk premiums in asset prices
UMP exit and the BCB’s response
• Brazil’s policy response focused on reducing interest rate and especially FX risk
• Launched program of regular FX swaps and FX credit lines
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Turkish Lira
Australian Dollar
Brazilian Real
Mexican Peso
Indonesian Rupiah
Indian Rupee
South African Rand
Polish Zloty
Russian Ruble
Czech Koruna
-60 -50 -40 -30 -20 -10 0
-36.8
-35.5
-33.9
-30.8
-28.2
-23.0
-22.5
-13.8
-8.6
-8.4
% Change in 1M ATM Implied Volatility*
Source: BCB
Lower FX volatility and risk premiums
* From Aug 22 (announcement of FX swaps and credit lines program) through Oct 18
1/ The Bloomberg U.S. Dollar Index tracks the performance of a basket of ten leading global currencies versus the U.S. Dollar (JPY, MXN, AUD, GBP, CAD, SGD, CHF, CNH, KRW and EUR).
Bloomberg USD Index 1/
Indonesian Rupiah
Yen
Turkish Lira
Swedish Krona
Mexican Peso
Colombian peso
Canadian Dollar
Swiss Franc
Euro
Chilean Peso
Norwegian Krone
Sterling pound
Russian Ruble
Poland Zloty
South African Rand
Indian Rupee
Australian Dollar
New Zealand Dollar
Real
-2.5
-0.3
1.0
1.3
1.6
1.8
1.8
2.2
2.4
2.5
3.1
3.5
3.7
3.7
4.4
5.0
5.5
7.4
8.6
12.2
BRL leads appreciation in the period*
South Africa
Germany
China
Brazil
Turkey
Russia
Mexico
United Kingdom
Chile
Peru
Portugal
Colombia
Spain
France
Belgium
Japan
Italy
Ireland
-50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0
-32.8
-31.6
-30.0
-29.0
-26.6
-26.1
-23.0
-22.0
-21.1
-17.2
-16.6
-14.4
-14.3
-14.1
-13.2
-13.1
-10.8
-7.7
% Change in CDS spreads (USD SR 5Y)*
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Concluding remarks
• Crisis led to a reevaluation of central banking mandates, tools, and policy frameworks
• Macroprudential policy has been effective in safeguarding financial stability in the post-crisis period
• Inflation targeting remains best framework for monetary policy
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Alexandre TombiniGovernorBanco Central do Brasil
October 2013
Shaping Central Banking’s Institutions in the New Paradigm
3rd SEACEN-CEMLA Conference
