Last year, due to a confidence crisis and doubts on the Brazilian public debt and the Brazilian economy the exchange rate depreciated strongly and, as a result, we have observed an increase in the current inflation rate and a contamination of future inflation expectations. The conduct of monetary policy will have as strategic priority the avoidance of this transitory hike in inflation being perceived as permanent. We will fight, unrelentlessly, against the expectation of an increase in the level of inflation and the indexation of the economy. The goal is to bring inflation back to the trajectory defined in the targets already set by the National Monetary Council (CMN). The Central Bank will pursue a path of convergence to the already defined inflation targets, taking into account that this convergence will not occur instantaneously. It is a common practice among Central Banks in the world to dilute the convergence of inflation to the targets over a period longer than a year. This is particularly important when an inflationary bubble arises due to a supply shock, as has been the case in Brazil. Therefore, we will proceed by aiming at an inflation rate that takes into account the inertia inherited from inflation in 2002, and the supply shocks stemming from the increase in administered and monitored prices in 2003. Therefore, monetary policy will maintain the goal of ensuring that inflation will return to its target path within a time period that does not result in unnecessary costs to the economy. Transparency in the process is essential.

The test of resilience of a bank or a system lies in its ability to absorb losses when a shock occurs – that is, its loss absorption capacity. For an individual bank, various tools, apart from surcharges or levies, should be considered. At the system level, adopting similar rules across institutions to prevent regulatory arbitrage should not inadvertently reduce the diversity in the global financial system. A variety of business models and investors with different risk appetites and liability-matching requirements may make for a more resilient system. 18. In the same vein, national regulators should explore a variety of approaches that are best suited to their conditions. Indeed, many emerging economies have banks that are systemic only in their local context, and national regulators need to consider how best to deal with these, even as we work together on global banks of systemic significance. 19. Third, post financial crisis, there is an understandable distrust of markets and supervisory judgment, and a preference to “hard-wire” most measures under Pillar 1 on capital. But we must not swing too far. Supervisors need to regain confidence and be prepared to exercise supervisory judgment – many economies have used macroprudential tools with some success by applying discretion. There is also scope for greater disclosure and market discipline under Pillar 3. Indeed, in the proposals relating to contingent capital – whether convertible bonds or bail-in arrangements, an understanding of the market dynamics relating to these instruments is crucial to their success. 20. Fourth, a sophisticated approach is not necessarily superior.