Central Banking in a Transforming Economy...Financial Education 30 •Create programs to stimulate financial education, through the deepening of actions with market and government

Central Banking in a Transforming Economy

Roberto Campos NetoGovernor of the Central Bank of Brazil

Overview Macroeconomic Overview1. Inflation and expectations around the target

2. Selic at a historical low

3. Challenging external outlook

4. Credit cost reduction

5. Gradual economic recorvery

Agenda : BCB’s structural agenda6. Agenda BC+ so far

7. The future of the Brazilian Financial System

8. New dimensions

Conclusions

BANCO CENTRALDO BRASIL 2

MACROECONOMICOverview

4

Inflationaround the target

** Expected IPCA (Focus, 03/29/2019)Source: BCB / IBGE

BANCO CENTRALDO BRASIL

0

2

4

6

8

10Se

p 1

5

Dec

15

Mar

16

Jun

16

Sep

16

Dec

16

Mar

17

Jun

17

Sep

17

Dec

17

Mar

18

Jun

18

Sep

18

Dec

18

Mar

19

Jun

19

Sep

19

Dec

19

%

dec/19

3.89dec/18

3.75dec/17

2.95

dec/16

6.29

dec/15

10.67

TARGET 4.50TARGET 4.25

IPCA (12 months accumulated)

IPCA* Market expectations**

* feb/2019: 3,89

The conduct ofmonetary policy

- Caution, serenity andperseverance

5


Anchoredexpectations

*Implied inflation expectations in inflation indexed bonds (NTN-B).**Implied inflation expectations in CPI futures (DAP).Source: BCB/IBGE

Inflation expectationsaround the target

8.1

5.0

2

3

4

5

6

7

8

9

10

11

%

Break-even inflation (01/29/2016)* Break-even inflation (07/29/2016)*

Break-even inflation (03/29/2019)** Actual IPCA

3.75

3.70

14.25

6.505

7

9

11

13

15

% p

.y.

Focus* (12/31/2015) Focus* (12/30/2016) Focus* (6/30/2017)

Focus* (3/29/2019) Target for Selic rate

6


Policy rate (Selic) at a historical low

Obs. : Median of market expectations, Focus survey.Source: BCB

- Stimulative real interest rate

7


Challenging externaloutlook

The global outlook remains challenging to EMEs.

• On the one hand, the risks associated with a slowdown in global growth, as

a result of several uncertainties, are more elevated.

• On the other hand, the risks associated with normalization of interest rates

in some advanced economies have receded.

• The Brazilian economy has capacity to withstand a setback in the external

scenario, relying on its robust balance of payments, anchored inflation

expectations and prospects of economic recovery.

8



PM

I

-10.0%

-7.5%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

48

49

50

51

52

53

54

55

56

57

58

Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19

3/3

m a

nn

ual

rate

Global indexes

PMI Manufacturing New export orders (G7+China)

Capital goods production proxy, (right)*

-1.2

-0.6

0.0

0.6

1.2

1.8

2.4

3.0

Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19

Number of 25 bps increases implicit in Fed Funds future markets

in 2019 in 2020

Source: Bloomberg, Thomson Reuters, Federal Reserve and BCB

9



-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

USA Canada Australia UnitedKingdom

Germany Japan

% p

.y.

Sovereign bonds (10 y)

6-months period Current value

Recession Indicators – CautionYield Curve (10 years - 3 months)

Source: Bloomberg and BCB

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

-200

-100

0

100

200

300

400

500


Emerging Markets:Portfolio Flows

Source: BCB

-20

-10

0

10

20

30

Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19

Flo

ws

(US$

bill

ion

s)

Brazil Emerging Markets Total

Emerging Markets: South Africa, South Korea, United Arab Emirates, India, Indonesia, Pakistan, Thailand, Turkey and Vietnam

10


% o

fG

DP

Source: BCB

Robust buffersCurrent account and net foreign investment flows

-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

Jan

-00

Au

g-0

0

Mar

-01

Oct

-01

May

-02

Dec

-02

Jul-

03

Feb

-04

Sep

-04

Ap

r-0

5

No

v-0

5

Jun

-06

Jan

-07

Au

g-0

7

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-

10

Feb

-11

Sep

-11

Ap

r-1

2

No

v-1

2

Jun

-13

Jan

-14

Au

g-1

4

Mar

-15

Oct

-15

May

-16

Dec

-16

Jul-

17

Feb

-18

Sep

-18

Current account deficit / GDP FDI / GDP

4.77Feb

0.74Feb

12 months accumulated11

12


Credit cost reduction

Credit cost

Source: BCB

The importance of guarantees

% p.y.

feb/19 mar/18-feb/19

ICC - Personal credit 119.3 120.8

ICC - Payroll-deducted personal loans 26.0 26.7

% p.y.

Period Total Non-earmarked Total Non-earmarked

May/2016 (A) 32.6 51.9 22.4 37.7

Feb/2019 (B) 25.0 38.5 21.1 32.5

B - A (p.p.) -7.6 -13.4 -1.3 -5.2

Interest rate ICC

13


ICC Spread Decomposition

Source: BCB

Deliquency Administrative Expenses Taxes and FGC ICC Financial Margin

37.36%

14.90%

22.76%

24.98%

2015-2017 average

14


Credit card revolving rates - households

Credit costreduction

Source: BCB

Rates in Feb/2019 (% p.m.)Total 12.1

In good standing 11.6

Overdue 12.5

% p

.m.

9

11

13

15

17

May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18 May 18 Sep 18 Jan 19

Total In good standing Overdue

7

9

11

13

Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 18

22

26

30

34

Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 18

15


Gradual reduction ofbanking spread

Feb/2019

25.4

oct/2016

33.7

jul/2016

12.4Feb/2019

9.6

Ho

use

ho

lds

(% p

.y.)

Co

mp

anie

s(%

p.y

.)

* Total creditSource: BCB

Avarege spread of

credit loans*

16


GDP gradual recovery

Market projections for 2019 (Focus 03/29/2019)Source: IBGE and BCB

160

165

170

175Se

p 1

6

Dec

16

Mar

17

Jun

17

Sep

17

Dec

17

Mar

18

Jun

18

Sep

18

Dec

18

Mar

19

Jun

19

Sep

19

Dec

19

Ind

ex, s

easo

nal

lyad

just

ed(1

99

5=1

00

)

2018

+1.1%

2019

+2.0%

Dec

10.8

11.4

5

6

7

8

9

10

11

12

13

14

15

Mar

2012

Mar

2013

Mar

2014

Mar

2015

Mar

2016

Mar

2017

Mar

2018

Mar

2019

Unemployment Seasonally adjusted (forecast)


GDP gradual recovery

Labor MarketUnemployment rate

%

60

70

80

90

100

110

120

130

Feb2009

Feb2010

Feb2011

Feb2012

Feb2013

Feb2014

Feb2015

Feb2016

Feb2017

Feb2018

Feb2019

Ind

ex, s

easo

nal

lyad

just

ed(2

00

8=1

00

)

Gross Fixed Capital Formation

Construction

Absorption of capital goods (except: oilplatform)

%

Feb 18 Dec 18 Feb 19 Mar 19* Dec 19*

Unemployment rate

Observed 12.6 11.6 12.4 12.9 10.8

Seasonally adjusted 12.4 12.2 12.2 12.2 11.4

Employed population** 2.0 1.0 1.1 1.3 1.7

Working force** 1.3 0.7 1.0 1.0 0.8

*forecast

**annual increase

Annual avarege 2017 2018 2019*

Unemployment rate 12.7 12.3 11.9

Employed population** 0.3 1.3 1.4

Working force** 1.7 0.8 1.0

*forecast

**annual increase

Dec

Source: IBGE17


GDP Focus expectations

Source: BCB

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Dec

17

Jan

18

Feb

18

Mar

18

Ap

r 1

8

May

18

Jun

18

Jul 1

8

Au

g 1

8

Sep

18

Oct

18

No

v 1

8

Dec

18

Jan

19

Feb

19

Mar

19

2019 2020

GD

P G

row

th

18


Economic growth depends on many factors:

• It is a work of government and society as a whole

• Reducing uncertainty and improving confidence are necessary

conditions for sustainable recovery

• Fiscal reforms

• Pension system reform

• Reforms to improve productivity

• tax, trade opening and improvement of the business

environment

• Future of the Agenda BC+

• Focus on investors: small or large; domestic or foreign.

Sustainablerecovery

A sustainable recovery of the

Brazilian economy depends on

the continuity of reforms and

adjustments

19

BCB’s structural agenda

Agenda

So far...

in 2016/17

19

in 2018

22

41actions

completedPillars:

• More financial citizenship

• More modern legislation

• More efficient financial system

• Cheaper credit

Agenda

21

Technologicalevolution

• The innovation route has intensified in recent years with the increase of:

• Processing capacity;

• Information storage;

• Information organization; and

• The interpretation of information and the use of data.

22

• We need to focus on the design of the financial system of the future:

● Democratize ● Digitalize

● De-bureaucratize ● Demonetize

• Tools to create this future:

● Blockchain ● Cloud

● Artificial Intelligence ● Digitalization

The future of thefinancial system

23

• Inclusion

• Competitiveness

• Transparency

• Financial Education

New dimensinons

24

Agenda

14 new working groups to studymore closely each topic

Inclusion

• Microcredit: • to increase the importance and the diffusion of microcredit in the market.

• Cooperativism: • to expand cooperativism in areas with low banking penetration, pursuing digital solutions.

• Capital Market: • to promote changes that allow the full development of our capital market.

• Converbility• to simplify rules, reduce bureaucracy and facilitate operations in the FX market.

• The TLP and the change in the BNDES’s focus have shown that, when the government

reduces, opening space in the market, private initiative flourishes.

• We will choose priorities and turn them into practical measures.

25

-

36

72

108

144

180

Dec2015

Mar2016

Jun2016

Sep2016

Dec2016

Mar2017

Jun2017

Sep2017

Dec2017

Mar2018

Jun2018

Sep2018

Dec2018

R$ bi

292 264 234 230

-

150

300

450

600

Dec2015

Mar2016

Jun2016

Sep2016

Dec2016

Mar2017

Jun2017

Sep2017

Dec2017

Mar2018

Jun2018

Sep2018

Dec2018

Bilh

õe

s

R$ bi

26

Growth in the capital market

Source: BCB BANCO CENTRALDO BRASIL

DebenturesAccumulated emissions in twelve months

Bank credit and debenturesTotal outstanding

Accumulated emissions in twelve months Bank Credit

Debentures

265258

287

356

Competitiveness

27

• Innovations:

• Instant payments:

• important mechanism to democratize the means of payments.

• Open Banking:

• to reduce entry barriers and increase competition.

• Guarantees:

• development of guarantee centers operating as mechanisms to diversify risks and provide means to

reduce market volatility.

• Cyber-security:

• this is a point of attention and risk in an increasingly digitized financial system.

• International reserves

• studies on the return and management of international reserves, and intervention instruments.

Transparency

28

• Rural Credit: studies on a new financing model for rural activity with focus on small and medium producers.

• Real estate market: modernize the mechanisms used to raise funds, allowing transparency on subsidies and widening the options available to households.

• Relationship with Congress: strengthen the relationship with Congress and to study ways to make objectives and progresses measurable.

• Relationship with major investors: develop mechanisms to improve the relationship of the Brazilian government with large portfolio investors.

Transparency

29

• Market Efficiency: enhance the efficiency in the market area of the BCB, generating synergies

and expanding the flow of information.

• Communication plan for the BCB actions: improve communication of our actions and

maintain frequent contact with the media and the public.

• Transparency and communication: develop objective and quantifiable methods to measure

the efficacy of our communication.

Financial Education

30

• Create programs to stimulate financial education, through the deepening of actions with

market and government institutions, and using cooperatives and microcredit entities as

dissemination agents.

• Increase the participation of the population in the financial system and the generation of

savings.

Conclusions

• The global outlook remains challenging, with changes in the risks.

• The macroeconomic environment:

• Inflation around the target and anchored expectations;

• Gradual process of economic recovery;

• Interest rates at historical lows.

• Brasil needs to continue on the path of reforms, notably those of fiscal nature, and adjustments in

the economy.

32


Conclusions

The Central Bank of Brazil must keep working to:

• Keep inflation low and stable, maintaining the excellent conduct of monetary policy, and

continue to improve our communication;

• Keep the financial system solid and efficient, with a larger and more democratic capital market,

with participation of more households and firms;

• Reduce the cost of financial intermediation, increasing the efficiency of this service and

enhancing the competition.

33


Conclusions

• Keep inflation low and stable, maintaining the excellent conduct of the monetary

policy, and continue to improve our communication mechanisms;

• Keep the financial system solid and efficient, with a larger and more democratic capital

market, including more people and firms (small and large; domestic and foreign);

• Reduce the cost of financial intermediation, increasing the efficiency of this service and

enhancing the competition;

31


Conclusions

Thank you

Documents

Central Banking in a Transforming Economy...Financial Education 30 •Create programs to stimulate financial education, through the deepening of actions with market and government