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
Major mandates Achievement of inflation target.
Decision-making process Majority
Frequency / length of meetings 8 times a year
Frequency of announcements Same
Main policy target Inflation control target (annual IPCA): 4.25% (2019), 4.0% (2020), 3.75% (2021) and 3.5% (2022), with a tolerance interval of +/– 1.5%.
Main policy tool: target for the overnight rate.

Overview of key features

Key policy rate Target cash rate
maturity (days) 1
Operating target Collateralised overnight transactions
maturity (days) 1
Standing facilities Lending, deposit
Corridor width (bp) 160
Reserve requirements Yes
maintenance period Two weeks
Main operation Repo / reverse repo
functions Liquidity injection / withdrawal
maturity (days) Liquidity injection / withdrawal
regular interval Liquidity injection / withdrawal
frequency Liquidity injection / withdrawal
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
keynote tender
standing facility

Monetary policy communication

Explicit use of forward guidance
Timing / media of policy announcement Yes. 18.00 pm on second day of board meeting; central bank website, Reuters and Bloomberg.
Policy announcement and documents Target cash rate
Explaining policy decisions Detailed press release/media statement
Dissemination of minutes (timing / media) Yes. 8.00 am on Tuesday, six days after the meeting.
Content of minutes Description of economic and financial conditions and the policy consideration.
Publication of forecasts As part of the quarterly Inflation Report.
Publication of projected path of policy rate No

Reserve requirements: ratios and size

Main functions served Liquidity management
Domestic currency Yes
Foreign currency No
Average 22.9%
Required reserves BRL 448 bn
Required reserve as % of GDP 6.42%
Actual reserves BRL 449 bn
Actual reserve as % of GDP 6.42%

Main features of reserve requirements

Averaging Y
Carry-over Y
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
Remuneration Y
average rate Demand Deposits: no remuneration; Savings: TR + 0,5%, if Selic target rate >8.5%, or 70% of Selic target rate otherwise; Others: Federal Funds Rate (Selic)
marginal rate Demand Deposits: no remuneration; Savings: TR + 0,5%, if Selic target rate >8.5%, or 70% of Selic target rate otherwise; Others: Federal Funds Rate (Selic)
Framework last changed 06/19

Liquidity position and forecasting

Structural Position Surplus
Most volatile factor(s) Government sector flows, Reserve requirements on sight deposit, Daily adjustment of FX swaps (swap cambial)
Most unpredictable factor(s) Reserve requirements on sight deposit, Daily adjustment of FX swaps (swap cambial)
Forecast horizon(s) 6 months
Frequency Daily
Frequency of revision Daily
Forecast published? No

Standing facilities: lending / market ceiling

Name Standing facility
Form Repo
Pricing method Base rate + 80 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 Standing facility
Form Reverse repo (=RP)
Pricing method Base rate – 80 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 RP and RRP
Maturity Up to 6 months
Frequency As needed
Pricing method Auction
Access limited by/to Primary Dealers and Financial institutions
Function(s) Reinforce target rate, Liquidity management

Open market operations: central bank bills

Name N/A
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 Repo lines of credit
Form Electronic auctions
Frequency As needed
Maturity Legally, up to 360 days, but in practice up to 180 days
Pricing Method Based on market conditions
Access limited by/to BCB's primary FX dealers
Function(s) Managing liquidity in the FX market

Settlement systems and intra-day liquidity facilities

Settlement system RTGS, since 2002
Intra-day liquidity facility Federal Bonds Repo
Charge No charge
Foreign currency settlement system N/A
CLS participation by banks N/A
Other settlement system(s) N/A


Standing facilities: List of eligible collateral Domestic Federal Bonds
Standing facilities: Discretion of central bank on collateral No
Open market operations: List of eligible collateral Domestic Federal Bonds
Open market operations: Discretion of central bank on collateral No

Dissemination of operational information: liquidity forecast

Forecast published? No

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 Brasília time
Deposit facility usage: Channel(s) BCB website
Deposit facility usage: Timing Weekly - every Wednesday at 12:30 Brasília time

Other information dissemination

Type (i) FX intervention
(ii) FX swap operations
(iii) Monetary policy rate – Selic (effective)
(iv) Long term interest rate –TJLP
(v) Interbank market rate – CDI (effective)
(vi) 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