Brazil
Brazil[R$]
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 | |
announcement | √ |
keynote tender | √ |
standing facility | √ |
other | √ |
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 |
restrictions | |
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 |
Collateral
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 |
---|---|
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 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 |