The Brazilian Economy

Governor of the Central Bank of Brazil

Ilan Goldfajn

April 06, 2018

BANCO CENTRAL

DO BRASIL

1

BANCO CENTRAL

DO BRASIL

THREE POSITIVE FENOMENA IN THE BRAZILIAN ECONOMY

- Lower inflation

- Lower interest rates

- Economic recovery

2

BANCO CENTRAL

DO BRASIL

Dec 15

10.67Aug 16

8.97

Aug 17

2.46

Feb 18

2.84

Dec 18

3.80

Dec 19

4.10

0

2

4

6

8

10

12Se

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

%

3

12-month inflation (IPCA)

Conditional forecasts*

*Considering interest and exchange rates from the Focus survey (Inflation Report, 2018/March).Source: BCB / IBGE

IPCA is converging

to the targets

BANCO CENTRAL

DO BRASIL

8.1

5.0

3.6

2

3

4

5

6

7

8

9

10

11

Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 18

%

Implied expectations (01/29/2016)* Implied expectations (07/29/2016)*

Implied expectations (03/29/2018)** IPCA (historical)

4

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

12-month inflation (IPCA): historical and implied expectations

Anchoring expectations was

fundamental

BANCO CENTRAL

DO BRASIL

5

Selic rate

Source: BCB

SELIC rate at historical lows

14.25

6.505

6

7

8

9

10

11

12

13

14

15

Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18

% p

.a.

BANCO CENTRAL

DO BRASIL

160

165

170

175Se

p 1

4

Dec

14

Mar

15

Jun

15

Sep

15

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

seas

on

ally

ad

just

ed in

dex

(1

99

5 =

10

0)

2018

+2.8%

2019

+3.0%

6

Accumulated decrease*

-7.8%

Real GDP

In yellow, market expectations (Focus survey, 03/29/2018).*Growth between the fourth quarter of 2014 and the fourth quarter of 2016.Source: BCB / IBGE

GradualGDP recovery

BANCO CENTRAL

DO BRASIL

Economic Outlook

1. The global outlook has been favorable, as economies grow

and interest rates are low worldwide

This has so far contributed to support risk appetite towards

emerging economies

2. The set of indicators of economic activity shows consistent

recovery of the Brazilian economy

3. Low inflation in Brazil, converging to the targets

7

BANCO CENTRAL

DO BRASIL

8

* Seasonal range: seasonal pattern compatible with the inflation target rangeSource: IBGE / FGV / BCB

0.1

0.3

0.5

0.7

0.9

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec Jan

Feb

% p

.m.

Core IPCA – Smoothed trimmed mean

0.1

0.3

0.5

0.7

0.9

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec Jan

Feb

% p

.m.

Core IPCA – Double-weighted

Seasonal range (3.0% - 6.0%) 2016/2017 2017/2018

Low core inflation

BANCO CENTRAL

DO BRASIL

9

* Seasonal range: seasonal pattern compatible with the inflation target rangeSource: IBGE / FGV / BCB

0.1

0.3

0.5

0.7

0.9

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec Jan

Feb

% p

.m.

Core IPCA – Trimmed mean

0.1

0.3

0.5

0.7

0.9

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec Jan

Feb

% p

.m.

Core IPCA – Underlying services

Sazonal Range (3.0% - 6.0%) 2016/2017 2017/2018

Low core inflation

BANCO CENTRAL

DO BRASIL

Monetary Policy

1. Risks around the baseline scenario remain in both directions:

Downside risk for inflation: (i) possible propagation through

inertial mechanisms of low inflation levels

Upside risk for inflation: (ii) frustration of expectations regarding

the continuation of reforms and adjustments; and (iii) a reversal

of the current benign global outlook for emerging economies

2. Monetary policy has the flexibility to react to risks in both

directions

10

BANCO CENTRAL

DO BRASIL

Monetary Policy

3. Copom – current assessment (baseline scenario):

Next meeting: the Copom views an additional moderatemonetary easing as appropriate and judges that this additionalstimulus mitigates the risk of delayed convergence of inflation

Beyond the next meeting: the Copom deems appropriate tointerrupt the monetary easing process, with the aim ofevaluating next steps

4. The Copom emphasizes that the next steps in the conduct of

monetary policy will continue to depend on:

Evolution of economic activity

Balance of risks

Possible reassessments of the extension of the cycle

Inflation projections and expectations

11

BANCO CENTRAL

DO BRASIL

12

Monetary Policy

5. The Copom understands that monetary policy has to balance

two dimensions

Inflation convergence to the targets at a proper pace

Endurance of a low inflation environment, even in the event ofadverse shocks

BANCO CENTRAL

DO BRASIL

13*Non-earmarked marketSource: BCB

Expansionary Monetary Policy Cyclesvariations from the start of the cycle (t0)

-12

-10

-8

-6

-4

-2

0

t-16 t-12 t-8 t-4 t0 t+4 t+8 t+12 t+16

Selic rate – pp

-25

-20

-15

-10

-5

0

5

t-16 t-8 t0 t+8 t+16

Credit interest rate* – pp

-15

-5

5

15

25

35

t-16 t-8 t0 t+8 t+16

New credit concessions* - %

R$ bi

178

218

254

323

246

% p.a.

26.3

19.8

13.7

12.4

14.2

% p.a.

57.8

47.4

43.3

38.1

53.3

1st cycle (may/03) 2

nd cycle (aug/05) 3

rd cycle (dec/08) 4

th cycle (aug/11) 5

th cycle (sep/16)

Current monetary easing cycle has a standard impact

BANCO CENTRAL

DO BRASIL

4

8

12

16

20

Dec 2015 Mar2016

Jun Sep Dec Mar2017

Jun Sep Dec

Cost of financing (% p.a.)

Corporate bonds (aggregate) Credit with BNDES funding

14Source: BCB and Cemec/Fipe

Capital market and external funding expanding

0510152025303540

0

20

40

60

80

100

2015 2016 2017

Sources of corporate financing (R$ bi)

Corporate bonds Equity (RHS) Promissory note (RHS)

Increasing importance of capital markets

BANCO CENTRAL

DO BRASIL

Final Remarks

• Outlook for 2018:• We see a consistent economic activity recovery with the IPCA

converging to the inflation targets, but there are risks

• The global outlook is benign, but this scenario will not last forever

• Significant progress in adjustments and reforms, with severalstructural measures already approved and multiple initiativesin progress

• Brazil must continue along that path in order to sustain a lowinflation, a low structural interest rate and the economicrecovery

15

The Brazilian Economy

Governor of the Central Bank of Brazil

Ilan Goldfajn

April 06, 2018

BANCO CENTRAL

DO BRASIL

16

THANK YOU

BANCO CENTRAL

DO BRASIL

17

Appendix

BANCO CENTRAL

DO BRASIL

18

Agenda BC+

lowercredit cost

BANCO CENTRAL

DO BRASIL

20

Agenda BC+ significant progress

1. New funding rate for BNDES operations (TLP)

2. Deal with depositors on economic plans of the 1980s and 1990s

3. New legislation on enforcement tools

4. Centralized settlement of payment schemes

5. Improvement of collateral and guarantees electronic registration

6. Credit card – new rules for revolving credit lines, and legalization ofprice differentiation among payment methods

7. Check – settlement period of one business day (T+1)

8. Central Bank in the social media

9. Financial education initiatives

• Progress on decade-old problems

• Efforts to reduce structural cost of credit

BANCO CENTRAL

DO BRASIL

21

Multiple initiatives in progressAgenda BC+ is a dynamic agenda

1. Central Bank autonomy

2. Stimuli to competition among financial institutions – wage account portability, authorization process, democratization of the debit card, fintechs, segmentation and proportionality

3. Relationship between the Central Bank and the Administrative Council for Economic Defense (CADE)

4. Improvement of the positive credit bureau (Cadastro Positivo)

5. Bank interest rate spread – overdraft, reserve requirements etc

6. Reduce the use of cash – incentive of debit card and technology in payment systems

7. Voluntary deposits as an auxiliary monetary instrument

8. Electronic commercial bill

9. Relationship between the Central Bank and the National Treasury

10. Bank resolution law

• Efforts to reduce structural cost of credit

• Initiatives tostimulate competition

BANCO CENTRAL

DO BRASIL

• Review the relationship between the Central Bank and the Treasury

• Work on a Punitive Legal Framework of the Financial System (MLD)

• Work on the bank resolution law

• Study the Central Bank autonomy framework(operational, administrative and budgetary)

• Review the legislation about market infrastructures

• Work on a financial stability law

22

betterlegal framework

BANCO CENTRAL

DO BRASIL

23

• Development of a new funding rate for BNDES operations (TLP)

• Simplification of the reserve requirements rules

• Improvement of the positive credit bureau (Cadastro Positivo)

• Regulation about covered bonds (LIG)

• Revision of the credit card system

• Encouragement of structural measures to reduce the bank interest rate spread

• Voluntary deposits as an auxiliary monetary policy instrument

• Improvement of collateral and guarantees electronic registration

• Analysis of the desirable structural level of reserve requirements

• Incentive of the debit card use

lowercredit cost

BANCO CENTRAL

DO BRASIL

• Financial institutions’ segmentation and proportionality in prudential regulation

• Centralized settlement of payment schemes

• Credit fintechs and cybersecurity

• Electronic commercial bill

• Deal with depositors on economic plans of the 1980s and 1990s

• Lower check settlement period to one business day (T+1)

• Revision of conduct regulation for financial institutions

• Improvement of FX and foreign capital regulation

• Promotion of agreements and enhancement of the efficiency of local currency international payments systems (SML)

• Integra BC Project (improvement of the authorization process)

• Deadlines for deciding on how to deal with financial institutions’ demands

• Revision of the declaration of Brazilian capital abroad (DCBE)

• Accounting of financial instruments – convergence to IFRS9 standard

• Revision of the taxonomy of the financial system

24

higher efficiency of the financial system

BANCO CENTRAL

DO BRASIL

25

• Intensification of communication through social media

• Reduction of credit card indebtness

• Increase of financial education

• Improvement of the mechanisms to solve conflicts between citizens and financial institutions

• Development of an online system for citizens to monitortheir requests at the Central Bank

• Creation of a committee to discuss issues related to the relationship involving the Central Bank, financial institutions and citizens

• Implementation of an open data policy and an open data online portal

• Development of the new Central Bank websites

• Development of financial citizenship indexes and evaluation of their impacts

• Adoption of a relationship policy towards citizens

more financial

citizenship