Monetary and exchange rate policy
in Peru
Adrián Armas
(BCR)
“XXI Meeting of the Latin American Network of Central
Banks and Finance Ministries“
May, 2005
Motivation
 Which are the optimal monetary and exchange rate regimes
in a dollarised economy?
 How can dollarisation risks, in terms of both the central
bank’s reaction function and regulatory issues, be dealt with?
 How can confidence in the domestic currency be restored?
 The Peruvian experience: inflation targeting in a partially
dollarised economy (IT + dollarisation risks control)
2
Agenda
 Financial dollarisation and its effects on
monetary policy design
 Financial dollarisation and its effects on
monetary policy implementation
 The BCR’s strategy for controlling financial
dollarisation risks
3
Financial dollarisation and MP design
M o n e ta ry p o lic y fra m e w o rk in P e ru
In fla tio n ta rg e tin g
+
F in a n c ia l d o lla ris a tio n
ris k s c o n tro l
F in a n cia l d o lla risa tio n co n sid e ra tio n s
4
Financial dollarisation and MP design
a. The inflation target
In fla tio n ta rg e ts in s o m e IT c o u n trie s
C o u n try
In fla tio n ta rg e t
T a rg e t's h o rizo n
A u s tra lia
2 % to 3 % (s in c e 1 9 9 3 )
M e d iu m te rm
B ra zil
5 ,1 % (fo r 2 0 0 5 )
1 ye a r
Canada
1 % to 3 % (s in c e 1 9 9 8 )
M e d iu m te rm
C h ile
2 % to 4 % (s in c e 2 0 0 1 )
M e d iu m te rm
C o lo m b ia
4 ,5 % to 5 ,5 % (fo r 2 0 0 5 )
1 ye a r
C ze c h R e p u b lic
2 % to 4 % (s in c e 2 0 0 5 )
M e d iu m te rm
M e xic o
2 % to 4 % (s in c e 2 0 0 4 )
M e d iu m te rm
N o rw a y
1 ,5 % to 3 ,5 % (2 0 0 1 )
M e d iu m te rm
P e ru
1 ,5 % to 3 ,5 % (s in c e 2 0 0 2 )
M e d iu m te rm
P h ilip p in e s
4 % to 5 % (fo r 2 0 0 4 -2 0 0 5 )
2 ye a rs
P o la n d
1 ,5 % to 3 ,5 % (s in c e 2 0 0 4 )
M e d iu m te rm
Sweden
1 % to 3 % (1 9 9 5 )
M e d iu m te rm
E n g la n d
2%
M e d iu m te rm
5
Financial dollarisation and MP design
b. The operational target
In te rb a n k in te re s t ra te
Interbank interest
rate volatility has
reduced
(in p e rc e n ta g e p o in ts )
Year
A ve ra g e
S ta n d a rd d e via tio n
1998
1 8 ,7
6 ,4 5
1999
1 5 ,0
4 ,7 2
2000
1 2 ,6
2 ,6 7
2001
9 ,0
0 ,9 1
2002
3 ,2
0 ,4 8
2003
3 ,4
0 ,0 9
2004
2 ,7
0 ,0 7
6
Peru: Interbank interest rate in domestic currency
Apr.04-Apr.05
Interest rates in domestic currency
(April 2004 - April 2005)
6%
Max
Min
5%
Rediscount in S/.
4%
Interbank
3,75
3,5
3,25
3%
2,25
2%
2,0
1,75
Overnight in S/.
1%
Apr
2004
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
2005
Feb
Mar
Apr
20
7
Agenda
 Financial dollarisation and its effects on
monetary policy design
 Financial dollarisation and its effects on
monetary policy implementation
 The BCR’s strategy for controlling financial
dollarisation risks
8
Financial dollarisation and MP implementation
M o n e ta ry p o lic y fra m e w o rk in P e ru
F in a n cia l d o lla risa tio n co n sid e ra tio n s:
P h illip s cu rve : re la tive lo w p a ss-th ro u g h
In fla tio n ta rg e tin g
A g g re g a te
dem and:
- fo re ig n cu rre n cy in te re st ra te
- b a la n ce sh e e t e ffe ct
E xch a n g e ra te : - U IP
- e xch a n g e ra te in e rtia l te rm
+
F in a n c ia l d o lla ris a tio n
ris k s c o n tro l
9
Financial dollarisation and MP implementation
The inflation forecasting system
Combines judgement and model-based projections
Main inflation forecasting model: QPM. Semi-structural,
calibrated model. Captures main monetary policy transmission
mechanisms
Assumes that financial markets are not under stress
10
Agenda
 Financial dollarisation and its effects on
monetary policy design
 Financial dollarisation and its effects on
monetary policy implementation
 The BCR’s strategy for controlling financial
dollarisation risks
11
Peru: Dollarisation Ratio
80
60
2000: 70%
2005: 54%
40
20
0
79
85
90
95
2000
2005
12
Financial dollarisation risks control
Financial dollarisation is decreasing, but still remains high
With high financial dollarisation, the economy is vulnerable
to large domestic currency depreciations
The BCR implements policies to mitigate the risks posed by
financial dollarisation
IT plus financial dollarisation risks control
13
Financial dollarisation risks control
M o n e ta ry p o lic y fra m e w o rk in P e ru
In fla tio n ta rg e tin g
+
D e d o lla risa tio n p o licie s
- IT
- S h o rt te rm in te re st ra te a s o p e ra tio n a l ta rg e t
- Y ie ld cu rve in d o m e stic cu rre n cy
F in a n c ia l d o lla ris a tio n
ris k s c o n tro l
14
Financial dollarisation risks control
Dedollarisation policies: building credibility in the target
In fla tio n ta rg e t a n d in fla tio n e x p e c ta tio n s : 1 9 9 5 -2 0 0 5
25
20
15
10
5
0
1995
1996
1997
1 99 8
In fla tio n ta rg e t
S o u rc e : C o n s e n s u s fo re c a s t
1999
2 00 0
2001
2 00 2
2003
2004
2005
In fla tio n e xp e c ta tio n tw o ye a rs in a d va n c e
15
Financial dollarisation risks control
Dedollarisation policies: long term financial instruments in soles
In te r e s t r a te s fo r d o m e s tic c u r r e n c y T r e a s u r y b o n d s
9,6%
10,0%
9,6%
Y ield ( % )
8,3%
7,3%
6,7%
6,6%
5,9%
6,0%
5,5%
6,0%
|
6,4%
5,7%
5,1%
4,6%
4,7%
4,5%
3,9%
3,0%
4,1%
3,9%
2,5%
3,6%
3,1%
2,7%
2,0%
Inter bank
6 months
1 y ear
A pr il 2003
1,5 y ear s
2 y ear s
3 y ear s
Dec ember 2003
4 y ear s
5 y ear s
6 y ear s
Dec ember 2004
7 y ear s
16
Financial dollarisation risks control
M o n e ta ry p o lic y fra m e w o rk in P e ru
F in a n cia l d o lla risa tio n co n sid e ra tio n s:
In fla tio n ta rg e tin g
P h illip s cu rve : re la tive lo w p a ss-th ro u g h
A g g re g a te
- fo re ig n cu rre n cy in te re st ra te
dem and:
- b a la n ce sh e e t e ffe ct
E xch a n g e ra te :
- U IP
- e xch a n g e ra te in e rtia l te rm
+
D e d o lla risa tio n p o licie s
- IT
- S h o rt te rm in te re st ra te a s o p e ra tio n a l ta rg e t
- Y ie ld cu rve in d o m e stic cu rre n cy
F in a n c ia l d o lla ris a tio n
ris k s c o n tro l
- A va ila b ility o f fo re ig n cu rre n cy liq u id fu n d s:
In te rn a lisa tio n o f risks a n d p o licy
re sp o n se s to n e g a tive sh o cks
- H ig h re se rve re q u ire m e n ts fo r fo re ig n
cu rre n cy lia b ilitie s
- H ig h N IR le ve l
- M o d e ra tio n o f e xce ssive fx vo la tility
17
Financial dollarisation risks control
Exchange intervention to reduce exchange rate variability has let a process
of NIR accumulation.
N e t In te rn a tio n a l R e s e rve s
1 3 .6
( b illio n o f U S d o lla rs )
14
1 2 .6
12
10
9 .6
9 .2
8 .4
8 .2
1999
2000
1 0 .2
8 .6
8
6
4
2
0
1998
2001
2002
2003
2004
2 0 0 5 A p ril
18
Financial dollarisation risks control
NIR accumulation has implied an increase of the CDBCRP’s stock.
C e n tra l B a n k C e rtific a te s o f D e p o s it (C D B C R P )
12
1 0 .0
( b illio n o f s o le s )
10
8 .3
8
6
4 .1
4
1 .4
2
1 .8
1 .6
2001
2002
0 .4
0
1999
2000
2003
2004
2 0 0 5 A p ril
19
Ja
n99
Ju
n99
No
v.9
9
Ap
r-0
0
Se
p00
Fe
b01
Ju
l-0
1
De
c01
M
ay
-0
2
Oc
t-0
2
M
ar
-0
3
Au
g03
Ja
n04
Ju
n04
No
v04
Ap
r-0
5
Peru: Nominal Exchange Rate
Jan.99-Apr.05
3.650
3.600
3.550
3.500
3.450
3.400
3.350
3.300
3.250
3.200
20
Financial dollarisation risks control
While interest rate variability has been reduced in recent years (2002-2004),
exchange rate variability maintains a similar level.
E x c h a n g e ra te va ria b ility
In te re s t ra te va ria b ility
P e rio d
In te rb a n k o v e rn ig h t in te re s t ra te
A v e ra g e m e a n (% )
P e rio d
E x c h a n g e ra te
A v e ra g e s ta n d a rd
A v e ra g e m e a n
A v e ra g e s ta n d a rd
d e v ia tio n (p p )
(S /.)
d e v ia tio n (S /. c e n ts )
1 9 9 9 -2 0 0 1
1 2 ,3
2 ,8
1 9 9 9 -2 0 0 1
3 ,4 6 0
1 ,3
2 0 0 2 -2 0 0 4
3 ,1
0 ,2
2 0 0 2 -2 0 0 4
3 ,4 7 0
1 ,2
T h e a ve ra g e sta n d a rd d e via tio n is a n a ve ra g e fo r m o n th ly sta n d a rd d e via tio n s
T h e a v e ra g e s ta n d a rd d e v ia tio n is a n a v e ra g e fo r m o n th ly s ta n d a rd
in e a ch o f th e tw o p e rio d s co n sid e re d in th e ta b le .
d e v ia tio n s in e a c h o f th e tw o p e rio d s c o n s id e re d in th e ta b le .
21
Peru: Interbank Interest Rate
Jan.02-Apr.05
In te rb a n k , b e n c h m a rk (c e ilin g ), a n d o ve rn ig h t d e p o s its (flo o r) in te re s t ra te s
( in
1/
p e rc e n ta g e p o in ts )
6 .0 0
5 .4
Escape Clause
5 .0 0
4 .0 0
3 .0 0
2 .0 0
1 .0 0
Ju
A
.
Ju
ay
M
n.
.
.
pr
A
b.
ar
M
Fe
l.
ug
.
S
ep
.
O
ct
.
N
D
ec ov
.
.
Ja 2 00
2
n.
20
03
Fe
b.
M
ar
.
A
pr
.
M
ay
.
Ju
n.
Ju
l.
A
ug
.
S
ep
.
O
ct
.
N
D
ec ov
.
.
Ja 2 00
3
n.
20
04
Fe
b.
M
ar
.
A
pr
.
M
ay
.
Ju
n.
Ju
l.
A
ug
.
S
ep
.
O
ct
.
N
D
ec ov
.
.
Ja 2 00
4
n.
20
05
Fe
b.
M
ar
.
A
br
.
Ja
n.
20
02
0 .0 0
In te rb a n k
S ta n d in g fa c ilitie s b e n c h m a rk
O ve rn ig h t d e p o s its
22
Concluding remarks
Peru is a financially dollarised ITer
IT + financial dollarisation risks control:
Inflation target
Interbank interest rate as operational target
Financial dollarisation considerations in the QPM
Dollarisation risks control
Financial dollarisation does not preclude independent
monetary policy oriented at maintaining low and stable
inflation
23
Concluding remarks
Inflation target fulfilment: 2002 to 2004
C o n s u m e r p ric e in d e x
(yo y% c h a n g e )
%
In fla tio n a ry s u p p ly
s h o c k s (fo o d a n d o il)
4 ,5
3 ,5
2 ,5
1 ,5
0 ,5
-0 ,5
-1 ,5
Ja
n.
20
Ap
02
r.
Ju
l.
Oc
t.
Ja
n.
20
Ap
03
r.
Ju
l.
Oc
t.
Ja
n.
20
Ap
04
r.
Gradual financial dedollarisation process
Ju
l.
Oc
t.
Ja
n.
20
05
24
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