Mr Lopes' speech before the Economic Affairs Commission of the Federal Senate  (Central Bank Articles and Speeches, 26 Jan 99)
Central bank: bcb | Type: speech | Date: 1999-01-26

## Mr Lopes' speech before the Economic Affairs Commission of the Federal SenateSummary of a speech by the new President of the Central Bank of Brazil, Mr Francisco before the Economic Affairs Commission of the Federal Senate in Brasilia on 26/ Translated from Jornal do Brasil of 27/1/99.## InflationI am sure inflation will not come back. Of course, there will be some adjustment in prices but there is no possibility of resuming the old inflationary process. We will h place tight monetary policy and prevent any forms of indexation, opportunism or specul the Brazilian economy is relatively closed - imports correspond to 8% of GDP - a devalu 50%, (i.e. the exchange rate stabilising at the very depreciated level of R$ 1.80), wou 4 to 5% to the rate of inflation.## Overvaluation of the realThe use of the exchange rate anchor made an exchange rate overvaluation inevi Nevertheless we had imagined it would be possible to shift from the mini-band regime to floating regime in a rather gradual way, while the economy was still attracting forei But reality sometimes frustrates the best intentions. With the benefit of hindsight (af and Russian crises), the widening of the exchange rate band in April last year, which w amplitude of the exchange rate fluctuation by 1% per year, was a rather timid movement. easy to be wise after the event.## Wider exchange rate bandThe attempt to shift from the mini band to the wider band lasted for 48 hours. We kne had limited chances of success. Within four days we had lost almost US$ 6 bill international reserves. And the free floating exchange rate regime, supported by a s stance, has become our new objective. The idea of widening the band under the model de and issued as of January 13 th was good, but unfortunately it came too late.## Centralisation of Foreign Exchange TransactionsSuggestions about centralising exchange market operations shock me. Because centra exchange market transactions in the central bank amounts to having no foreign exchange it leads the country to the moratorium, with the re-negotiation of debts. Credit lin would be cut. It means violating the rules of the game. It would be a completely arb which would have terrible consequences.## Economic GrowthThe first semester of this year will be hard. But I believe that from next year we will rates of growth - maybe spectacular rates of growth.## Interest ratesInterest rates will be kept high at first, but not for a long time.## DollarisationI do not see any case for dollarisation in Brazil. It is a little bit strange for a cou its own currency. There will come the day when the adoption of a single currency wit MERCOSUR will be taken into account by its member countries. But then a common currenof the region, not the dollar, will be agreed upon and the first step in this directi strong real.## ResponsibilityI have been in the government since the beginning of 1995. I feel myself responsible for been done during this whole period. Pedro Malan has a key role in the government. Brazilians have his international credentials. He has good relations with men that world of international finance. His continued presence is essential to consolidate th period. But we should care about policies rather than names . Malan and I are carrying out a mission.## Devaluation of the realNo economy in the world could sustain a devaluation in real terms of 40%. The diffi maintaining a devaluation of that magnitude is that inflation would resume. The excha has overshot, but it will come back, appreciating as time elapses.## Currency BoardI would like to stress my opposition to the idea of adopting a currency board in Br subject has already been examined and the government has decided against it. The Br economy is not dollarised and I believe it would be a disastrous policy option. Bra similar regime in 1906. Nowadays, money supply in the expanded concept (M4) comes to R$ billion, while international reserves reach US$ 36 billion. To implement this regime have to dollarise and lengthen the maturity of these deposits. This government is committed to avoid such measures.## FutureThe devaluation of the real will improve the fiscal balance, as it will permit interes in the future. Foreign investors will return, sustaining economic growth. My optimis foolish. The next six months will be very hard. I am optimistic on what will take place## UnemploymentI believe that the unemployment rate has to do more with the overvalued exchange rate th the level of economic activity. Enterprises were being crushed.