Brazil
Brazil[BRL]
Institutional framework
At the beginning of March 1999, the Brazilian Government announced its intention to start conducting the monetary policy based on an inflation targeting framework. Brazil formally adopted the inflation targeting regime as monetary policy guideline with the edition of the Decree 3,088 by the President of the Republic, on 21 June 1999. On 30 June 1999, the National Monetary Council (CMN) issued the Resolution 2,615, which defined the reference price index and inflation targets for 1999 and for the two years thereafter.
In Brazil, the inflation target is set in terms of the year-over-year rate of increase in the Broad National Consumer Price Index (IPCA), one of the Brazilian CPIs. This index is calculated by the Brazilian Institute of Geography and Statistics (IBGE). The Brazilian regime considers a headline index as reference, in line with most countries that adopt formal targets for inflation.
Most central banks use a short-term interest rate as the main instrument of policy. Likewise, the Brazilian inflation targeting regime uses the Selic rate as the primary instrument of monetary policy. The Selic rate is the average interest rate charged on the daily loans with a maturity of one day (overnight) backed by government securities registered in the Special System for Settlement and Custody (Selic), ie, the interest rate that balances the market for bank reserves. The Monetary Policy Committee (Copom) sets the target for the Selic rate, and it is up to the open market desk operations of the Banco Central do Brasil (BCB) to keep the effective Selic rate close to the target.
Key features of the monetary policy implementation framework
1. Open market operations
Open market operations (OMO) comprise purchases and sales of securities in the secondary market, either outright transactions or considering resale and repurchase agreements (repos). On its OMO, the BCB uses exclusively federal public debt securities under custody in Selic.
The BCB manages excess bank liquidity. To manage this excess liquidity, the BCB conducts daily sales operations of federal securities, from its portfolio, with a commitment to repurchase at a future date (reverse repo), through competitive auctions. Nowadays, the term of these operations ranges from 1 to 180 days.
Early in the morning, around 9 am, the BCB conducts overnight auctions to drain excess liquidity. The 45-day reverse repo operation occurs on the day after the Copom's meeting and lasts until the next Committee meeting.
The long-term reverse repo (3 and 6-month) takes place every day, alternately, at the end of the morning.
Still at the end of the day, the open market trading desk injects and/or drains liquidity at punishing rates (standing facility).
To define its strategy for managing bank liquidity, the BCB develops liquidity forecasts for up to 6 months, with daily adjustments.
The main factors affecting bank liquidity in Brazil are US dollar buying/selling, banks' reserve requirements movements and the National Treasury operations (revenues, expenses, redemption/placement of debt securities).
2. Reserve requirements and standing credit facilities.
In order to set a cap on money market rates (repo market) and fine tune liquidity, BCB has standing credit facilities, available in two different terms: intraday and overnight. Liquidity is provided through repo operations, accepting only government securities as collateral. These facilities have "zero" costs and 100 bps over the policy rate, respectively.
Within the monetary policy operational framework, reserve requirements (RR) have also a role for liquidity absorption. They represent an exogenous factor in determining the setup of liquidity absorption OMO. Currently, the RR framework consist of three different types, according to types of financial institutions liabilities. They aim not only at contributing to sterilisation of bank reserves, but also at keeping liquidity buffers for financial stability reasons.
RR on demand deposits have an objective of creating a demand for bank reserves to assure adequate functioning of the money market and of the Brazilian Payment System. It has also a role in monetary policy by limiting the multiplier effect on commercial bank money. RR on demand deposits are met through the average of balances within a two-week maintenance period and reserve balances are not remunerated.
RR on time deposits have the objectives of keeping liquidity buffers that can be used in liquidity shortage situations, and of absorbing liquidity as a secondary instrument. They have neutral effect on market rates, once they are remunerated at the policy rate (Selic). RR on savings deposits work as a liquidity buffer that aids the management of assets and liabilities related to earmarked credit (real estate lending and rural credit) in the financial system. They are remunerated at same rates as those of savings deposits. Both remunerated required reserves are kept in different accounts at BCB, that can be drawn, without cost, for intraday usage.
Institutional setup of monetary policy decisions and operations
| Policy decision body, size and composition | Monetary Policy Committee - Copom / 9 members / Governor and Deputy Governors of the BCB |
|---|---|
| Major mandates 1 | In Feb 2021 legal operational independence was approved by Congress. Governor and Deputies have a four year mandate. The inflation target regime was established by an executive measure (3.088/99). Inflation target for each year is established by National Monetary Council (CMN) by June, three years before it is effective. CMN is formed by Minister of Economy (Chairman), Special Secretary of Budget and Treasury, and Governor of the Banco Central do Brasil. |
| Decision-making process | Majority |
| Frequency / length of meetings | ordinarlly, 8 times a year / 2 days per meeting |
| Frequency of announcements | ordinarilly, 8 times a year |
| Main policy target | Inflation target (annual IPCA): 4.0% (2020), 3.75% (2021), 3.5% (2022), 3.25% (2023), 3.0% (2024) and 3.0% (2025), with a tolerance interval of +/– 1.5%. |
Overview of key features
| Key policy rate | Selic Rate - Target overnight rate |
|---|---|
| maturity (days) | 1 |
| Operating target | Selic rate - overnight rate |
| maturity (days) | 1 |
| Standing facilities | Lending, deposit |
| Corridor width (bp) | 70 (from Selic rate -35 bp to Selic rate +35 bp) |
| Reserve requirements | Yes. Aplicable for demand deposits, savings and time deposits |
| maintenance period | Two weeks for demand deposits / 1 week for savings and time deposit |
| Main operation 2 | Repo / reverse repo |
| functions | Liquidity injection / withdrawal |
| maturity (days) | 1 to 360 |
| regular interval | Yes |
| frequency | As required |
| Overall frequency | As required |
| Discretion left to operational desk | Some discretion with respect to choice of instruments (mainly overnight repos), size and timing of operations in order to reach the interest rate target |
| Key policy signals via | Selic Rate |
| announcement | Communication just after meeting (the market is closed). Auction effective in the next morning |
| keynote tender | Repo / reverse repos |
| standing facility | Lending, deposit |
| other |
Monetary policy communication
| Explicit use of forward guidance | BCB made an explicit use of forward guidance in August 2020, which ended in January 2021. Copom often provides some forward guidance on its next decision. |
|---|---|
| Timing / media of policy announcement | 6:30 p.m. or later, on the second day of Copom meeting, right after the meeting finishes (after domestic markets closure) / BCB website |
| Policy announcement and documents | Copom Statement announces the target for the overnight interbank interest rate. Policy decisions are also discussed in the Copom minutes and in the quarterly Inflation Report. |
| Explaining policy decisions | Scenarios, global outlook, Brazilian economy, inflation readings, inflation expectations and projections, balance of risks, guidance |
| Dissemination of minutes (timing / media) | 8.00 am on Tuesday, six days after the meeting / BCB website |
| Content of minutes | Update of recent economic developments, scenarios and risk analysis, discussion about the conduct of monetary policy, and monetary policy decision |
| Publication of forecasts 3 | Inflation projections are published on the Copom Statements, Minutes and Inflation Report. The Inflation Report presents projections for other macroeconomic variables and more details about inflation projections, including a fan-chart for inflation projections. |
| Publication of projected path of policy rate 4 | BCB does not publish its own projections for the interest rate. The published projections use the path of policy rate that comes from the survey conducted among professional forecasters (Focus Survey). This path is public information and is also described in the Copom documents. |
Reserve requirements: ratios and size
| Main functions served | Liquidity management, prudential issues |
|---|---|
| Domestic currency | Yes |
| Foreign currency | No |
| Average | 15% 5 |
| Required reserves | BRL 497 bn 6 |
| Required reserve as % of GDP | 5.38% 7 |
| Actual reserves | BRL 493 bn 8 |
| Actual reserve as % of GDP | 5.34% 9 |
Main features of reserve requirements
| Averaging | Yes for demand depoists. No for savings and time deposits |
|---|---|
| Carry-over | Yes for demand depoists. No for savings and time deposits |
| Type | Lagged |
| Maintenance period | Demand Deposits: 2 weeks; Others: 1 week |
| end (day) | Fridays |
| Calculation period | Demand Deposits: 2 weeks; Others: 1 week |
| end (day) | Fridays |
| Lag before maintenance | 1 week |
| Vault cash | N |
| restrictions | |
| Remuneration | Yes |
| average rate | Demand Deposits: no remuneration; Savings: TR + 0,5%, if Selic target rate >8.5%, or TR + 70% of Selic target rate otherwise; Others: Federal Funds Rate (Selic) 10 |
| marginal rate | |
| Framework last changed | 10/2020 |
Liquidity position and forecasting
| Structural Position | Surplus |
|---|---|
| Most volatile factor(s) | Government sector flows, demand deposits, changes in the international reserves position and Daily adjustment of FX swaps ("swap cambial") |
| Most unpredictable factor(s) | Reserve requirements on sight deposit and Daily adjustment of FX swaps (swap cambial) 11 |
| Forecast horizon(s) | Up to 1 year |
| Frequency | Daily |
| Frequency of revision | Daily |
| Forecast published? | No |
Standing facilities: lending / market ceiling
| Name | Nivelamento 12 |
|---|---|
| Form | Repo |
| Pricing method | Base Selic rate + 35 bps |
| Maturity | 1 day |
| Access limited by/to | Financial institutions; eligible collateral |
| Function(s) | Marginal liquidity accommodation; limit interest rate volatility; short-term liquidity provision |
Standing facilities: deposit / market floor
| Name | Nivelamento 13 |
|---|---|
| Form | Reverse repo (=RP) |
| Pricing method | Base Selic rate – 35 bps |
| Maturity | 1 day |
| Access limited by/to | Financial institutions that are primary dealers; eligible collateral |
| Function(s) | Marginal liquidity accommodation; limit interest rate volatility; short-term liquidity withdrawal |
Open market operations: repo or reverse repo
| Name/Type 14 | RP and RRP, being RRP almost all the time |
|---|---|
| Maturity | from 1 day up to 1 year 15 |
| Frequency | As needed |
| Pricing method | Auction |
| Access limited by/to | Primary Dealers and Financial institutions |
| Function(s) | Reinforce target rate and Liquidity management |
Open market operations: central bank bills
| Name | N/A 16 |
|---|---|
| Total issuance | N/A |
| Maturity | N/A |
| Restrictions on possible maturities | N/A |
| Pricing method | N/A |
| Access limited by/to | N/A |
| Discretion left to operational desk | N/A |
Open market operations: FX swaps
| Maturity | N/A |
|---|---|
| Frequency | N/A |
| Pricing method | N/A |
| Access limited by/to | N/A |
| Function(s) | N/A |
Other significant liquidity management means
| Name/Type 17 | Interest bearing voluntary deposits |
|---|---|
| Form | Electronic auctions |
| Frequency | Daily |
| Maturity | 1 Day |
| Pricing Method | Accept full amount at the effective base rate (Selic) |
| Access limited by/to | All financial institutions |
| Function(s) | For monetary policy purposes / Managing liquidity in the money markets 18 |
Settlement systems and intra-day liquidity facilities
| Settlement system | (1) STR; (2) SPI 19 |
|---|---|
| Intra-day liquidity facility | Using Federal Govt bonds repos or reserve requirements |
| Charge | Systems are charged per transaction. Intraday liquidity for STR is free of charge. "After hours" liquidity for SPI is charged 90% Selic rate. |
| Foreign currency settlement system | N/A |
| CLS participation by banks | N/A |
| Other settlement system(s) | N/A |
Collateral
| Standing facilities: List of eligible collateral | Domestic Federal Govt Bonds |
|---|---|
| Standing facilities: Discretion of central bank on collateral 20 | No |
| Open market operations: List of eligible collateral | Domestic Federal Bonds |
| Open market operations: Discretion of central bank on collateral 21 | No |
Dissemination of operational information: liquidity forecast
| Forecast published? | No |
|---|---|
| Channel(s) | |
| Timing | |
| Remarks |
Dissemination of operational information: open market operations
| Volume and price published? | Yes |
|---|---|
| Channel(s) | BCB website |
| Timing | Immediately after operations |
Dissemination of operational information: standing facilities
| Lending facility usage: Channel(s) | BCB website |
|---|---|
| Lending facility usage: Timing | Weekly - every Wednesday at 12:30 BrasÃlia time |
| Deposit facility usage: Channel(s) | BCB website |
| Deposit facility usage: Timing | Weekly - every Wednesday at 12:30 BrasÃlia time |
Other information dissemination
| Type | (i) FX spot intervention (ii) FX swap operations (iii) Monetary policy rate – Selic (effective) (iv) Long-term rate – TLP (v) Interbank market rate – CDI (effective) (vi) Quarterly Inflation Report (vii) Financial Stability Report (viii) Speeches and presentations by Board members (ix) Research articles (working papers) (x) BCB economists survey (Focus report) (xi) Reserves data (xii) Treasury account balances |
|---|---|
| Channel(s) | BCB website |
| Timing | (i) Weekly (ii) Real time just after the auctions (iii) Daily (iv) Daily (v) Daily (vi) Quarterly (vii) Semesterly (viii) Same day (ix) Occasionally (x) Weekly (xi) Weekly (xii) Weekly for reserve requirements, daily for international reserves |
1 Describe as well the legal status of the mandate and involvement of government
2 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).
3 For instance, economic and inflation forecasts related to policy decision.
4 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.
5 Corresponds to the ratio between total required reserves and the reserves base (liabilities) as of Sep/2022
6 As of Sep/2022
7 As of Sep/2022
8 As of Sep/2022
9 As of Sep/2022
10 Reference rate (TR) is calculated daily using the fixed rates for 30 days minus a "reducer". Used mainly for Savings accounts and real state financing
11 Response changes depending on the period. Unpredictable for next day, next couple weeks/month ?
12 "Fine Tuning Facility"
13 "Fine Tuning Facility"
14 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).
15 More than 90% of the volume through 1 day. Not usual to go beyond 3 months
16 BCB is forbidden to issue bonds by Federal Law
17 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.
18 It is a new tool, flexible in terms of form, frequency, maturity if needed
19 STR is Brazilian LVTS, operating since 2002, on weekdays from 6h30 to 18h30
SPI is Brazilian instant payment system, working since Nov 2020, 24h/7d
20 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.
21 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.