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EMTA Forum - São Paulo - May 10, 2011

Monetary Policy Director Mendes and Former Central Bank Directors Discuss Macroprudential Measures at EMTA São Paulo Forum

Brazilian Central Bank Director of Monetary Policy Aldo Mendes discussed the Brazilian economy, while four former Central Bank directors debated inflation and SELIC rate policy at EMTA’s Fourth Annual Forum in São Paulo.  Itaú BBA sponsored the event, which was held on May 10, 2011 and attracted a near-capacity crowd of 175.

EMTA Board Director Rudi Fischer delivered the Forum’s welcoming remarks, and reminded attendees of the predictions they had made for key economic variables at last year’s meeting.  Fischer noted that attendees’ optimism on the BOVESPA had proven untrue, standing at 64,621 (vs expectations of 75,000); and the BRL at 1.61 was not foreseen by attendees who had forecast a 1.87 fx rate.  The SELIC prediction of 11.41% was not far off from the 12% rate in effect, he noted.

Mendes reviewed key economic indicators, pointing out that Brazilian GDP reached 7.5% last year and was currently forecast at 4% in 2011.  Strong growth in recent years has brought unemployment down to historic lows, he observed.  International reserves continue to grow, and account for approximately 15% of GDP, below the level of the other BRIC nations.  Industrial production and retail sales were on an uptrend, while consumer confidence was below recent high levels.  Thus, Mendes concluded, the strength of the economy was well documented.

Mendes then discussed the Brazilian economy in a global context.  While G-10 Central Banks were keeping rates at historical low levels, Brazil was among the emerging nations in tightening mode.  Comparing ten major EM countries to developed economies, Mendes observed that inflation in emerging countries remained above official targets, while this was not a concern in most OECD economies.  In the first four months of the year, rate hikes became more frequent in EM countries, in an attempt to slow down over-heating economies.

Mendes concluded his presentation by focusing on the macroprudential economic measures adopted by Brasilia.  These measures have included higher capital requirements for consumer loans (including auto loans, payroll-deducted loans and personal loans), and higher minimum payments for credit card bills.  Reserve requirements for time deposits have effectively removed 65 billion reals from the economy, and have also been imposed on short FX positions in the spot market.

Mendes acknowledged that the adoption of macroprudential measures has been widely debated in the international financial community.  “We really should be calling them prudential macro measures, rather than macroprudential measures,” he suggested.  Such measures were designed to reduce the possibility of a credit bubble occurring, and lower demand for credit rather than extinguishing it.  Many new consumers in Brazil do not have experience with credit cards, Mendes reminded attendees, explaining why minimum payments had been instituted.  “Macroprudential measures cannot replace traditional macro economic measures to cool down an economy, but they can compliment them,” Mendes stressed.

Brazil’s macroeconomic policies (an inflation-targeting regime, fiscal responsibility and exchange rate flexibility) have resulted in stability, sustainable growth, and the ability to absorb shocks.  The 2008 developed market crisis tested Brazil, but the resurgence of the economy demonstrates “that we passed the test,” he concluded. 

Click Here for Mendes’ slide presentation.

Following Mendes’ keynote presentation, Itaú BBA’s Guilherme da Nobrega moderated a panel composed of four former Central Bank of Brazil officials.  The panel explored inflation, Central Bank monetary policy, the use of macroprudential measures, employment and commodity prices.  Alexandre Schwartsman began by predicting that inflation will “persistently” remain well above target rates and argued that the Central Bank has been behind in raising interest rates.  Rodrigo Azevedo (Ibiuna Investimentos) also expressed concerns regarding the Brazilian government’s current position regarding monetary policy and inflation.

“Last year, the Central Bank was wrong and so they missed the opportunity to be ahead of the curve and today they are behind,” mused Luiz Fernando Figueiredo of Maua Sekular Investismentos.  This made credibility a bit of an issue, he added.  While the 2010 environment required a careful approach, inflation turned out to be much higher than both the Central Bank and economists had expected.  This miscalculation seemed to manifest itself viscerally, “I think you could see the anguish on Mantega’s face when he announced the 3% IOF tax,” Figueiredo suggested.  Figueriedo further noted that while Brazil has one of the highest interest rates in the world at the present, raising or lowering interest rates cannot and should not be the only tool the government uses to manage its monetary policy.

The problem remained, Figueiredo stressed, that Brazil’s already high interest rates have continued to attract foreign inflows, and thus have lead to more inflation.  Macroprudential measures have delivered good results, and the Central Bank has demonstrated a flexible approach; this could prove important as simply hiking rates would have “ugly side effects.”

Affonso Pastore (A.C. Pastore & Associados) commented that recent actions have led him to believe that the Central Bank’s commitment to the official target rate was “very lenient” and that officials might, in fact, be prepared to live with an unofficial target rate of 6.5% inflation.  Pastore noted that labor shortage remained an issue in Brazil, and pointed out that this would not be solved by imposing macroprudential measures.

Panelists were asked to discuss the short-term economic outlook for Brazil.  Azevedo highlighted that a challenge for the Central Bank was to assist firms to justify smaller wage increases, as a means to short-circuit a cycle of inflationary pressures.  Schwartsman expressed concern that the Central Bank might end its tightening cycle prematurely.

Longer-term, Figueiredo urged policy makers to work towards a 3% inflation target.  He agreed that employers must be better equipped to handle demands for wage increases from workers.

“I am afraid of inflation above the target, full stop,” stated Pastore, who specified his concern that Brasilia would accept above-target inflation over the longer term as well.  He reminded participants that the Central Bank is not immune from political pressure and that, in a juggling of a variety of objectives, higher inflation might end up being tolerated.

At the end of the discussion, da Nobrega revealed the results of the annual attendee poll for key variables in 2012.  According to the results, panelists expect small changes in the BRL and SELIC rates.  The average forecast of attendees for the BRL/USD rate in May 2012 stood at 1.65 and the SELIC was expected to be at 12.46%.  A ten percent return on the BOVESPA was expected, with attendees predicting it would stand at 70,000 next May.