2. 1 Rio de Janeiro, June 2001 Banco Central do Brasil Money Markets and Coordination with Monetary Policy: The Brazilian Experience 1st Regional Workshop in Developing Government Bond Markets in Latin America

3. 2 FMonetary Policy in an Inflation Targeting Framework –July/1999: Implementing new Monetary Regime –Floating exchange rate regime –Declining inflation targets: 8% for 1999, 6% for 2000, 4% for 2001 and 3.5% for 2002, with  2% tolerance interval –Central Bank: operational independence, accountability and transparency –Well-succeeded experience: Inflation in the targeted range in 1999 and in 2000 Monetary Policy in Brazil

4. 3 FMain instrument: target for the Selic rate (overnight rate for government bonds in the Sistema Especial de Liquidação e Custódia) –Changes in Selic rate move the interest rate term structure; –in consequence, affect inflation with a lag (transmission mechanisms of monetary policy aggregate demand, exchange rate, expectations and credit channel) –topic interventions to avoid volatility Monetary Policy in Brazil

5. 4 FObjectives for domestic debt management policy –Maturity lengthening of National Treasury issues –Increase the share of fixed-rate securities, and price- indexed long-term securities –Gradually reduce the share of US dollar and overnight- indexed securities on total outstanding –Reduce the borrowing costs for the government –Expand the secondary market for government bonds Domestic Debt Management Policy

6. 5 FBrazilian “peculiarities” –Approximately 38% of federal debt maturing in the next 12 months; –low share of fixed-rate securities in total outstanding - domestic debt carries interest and exchange rate risks; Domestic Debt Management Policy

7. 6 Gradual change in debt composition Gradual change in debt composition April, 2001 Fixed Rate 12% FX Indexed 25% Inflation Indexed 12% Overnight Indexed 51% December, 1999 Fixed Rate 9% Overnight Indexed 57% Inflation Indexed 11% Fx Indexed 23%

8. 7 Domestic Debt Management Policy Average Maturity - New Public Bond Issues Average Maturity - Public Debt In Number of Months F Lengthening of debt - total outstanding and new issues 27,3 29,028,9 29,0 29,3 29,0 29,3 29,8 29,9 31,6 32,2 31,4 32,0 AprJunAugOctDecFebApr 30,8 29,0 24,2 23,3 24,0 26,7 28,728,9 41,7 45,5 21,2 47,3 MayJulSepNovJanMar 00010001

9. 8 FMoney Markets - Objective is to manage short-term liquidity –Unstable government cash flows due to government spending, revenues and debt redemption schedule –Net position of the government affects liquidity; –Central Bank operates on daily basis through daily “auctions” to manage liquidity; –Initiatives to foster money market instruments (repurchase agreements, securities lending, new payments system) Money Markets

10. 9 FWeekly meetings to co-ordinate strategy regarding: –structure of redemptions –liquidity outlook –market conditions in relation to type of securities, maturities and volumes –Treasury cash-flow Central Bank acts as the payments agent of the Treasury –Final decision always from the Treasury Coordination with Treasury