Banco Central do Brasil Money Markets and Coordination

Banco Central do Brasil Money Markets and Coordination with Monetary Policy: The Brazilian Experience 1 st Regional Workshop in Developing Government Bond Markets in Latin America Rio de Janeiro, June 2001 1

Monetary Policy in Brazil F Monetary Policy in an Inflation Targeting Framework – July/1999: Implementing new Monetary Regime – Floating exchange rate regime – Declining inflation targets: 8% for 1999, 6% for 2000, 4% for 2001 and 3. 5% for 2002, with 2% tolerance interval – Central Bank: operational independence , accountability and transparency – Well-succeeded experience: Inflation in the targeted range in 1999 and in 2000 2

Monetary Policy in Brazil F Main instrument: target for the Selic rate (overnight rate for government bonds in the Sistema Especial de Liquidação e Custódia) – Changes in Selic rate move the interest rate term structure; – in consequence, affect inflation with a lag (transmission mechanisms of monetary policy aggregate demand, exchange rate , expectations and credit channel) – topic interventions to avoid volatility 3

Domestic Debt Management Policy F Objectives for domestic debt management policy – Maturity lengthening of National Treasury issues – Increase the share of fixed-rate securities, and priceindexed long-term securities – Gradually reduce the share of US dollar and overnightindexed securities on total outstanding – Reduce the borrowing costs for the government – Expand the secondary market for government bonds 4

Domestic Debt Management Policy F Brazilian “peculiarities” – Approximately 38% of federal debt maturing in the next 12 months; – low share of fixed-rate securities in total outstanding domestic debt carries interest and exchange rate risks; 5

Domestic Debt Management Policy • Gradual change in debt composition December, 1999 Overnight Indexed 57% April, 2001 Inflation Indexed 11% Fixed Rate 9% Fx Indexed 23% Inflation Indexed 12% FX Indexed 25% Fixed Rate 12% Overnight Indexed 51% 6

Domestic Debt Management Policy F Lengthening of debt - total outstanding and new issues Average Maturity - Public Debt Average Maturity - New Public Bond Issues 32, 2 32, 0 31, 6 31, 4 29, 3 29, 028, 9 29, 0 41, 7 30, 8 29, 829, 9 29, 3 29, 0 24, 2 23, 3 24, 0 26, 7 47, 3 45, 5 28, 7 28, 9 21, 2 27, 3 Apr 00 Jun Aug Oct In Number of Months Dec Feb 01 Apr May 00 Jul Sep Nov Jan 01 Mar 7

Money Markets F Money Markets - Objective is to manage short-term liquidity – Unstable government cash flows due to government spending, revenues and debt redemption schedule – Net position of the government affects liquidity; – Central Bank operates on daily basis through daily “auctions” to manage liquidity; – Initiatives to foster money market instruments (repurchase agreements, securities lending, new payments system) 8

Coordination with Treasury F Weekly meetings to co-ordinate strategy regarding: – structure of redemptions – liquidity outlook – market conditions in relation to type of securities, maturities and volumes – Treasury cash-flow agent of the Treasury Central Bank acts as the payments – Final decision always from the Treasury 9