We have policy space today due to our preventive, cautious and prudent policies that preserved macro-financial stability through the adoption of a pragmatic approach towards capital inflows over the last few years. It is now a well-understood and documented story: ample global liquidity due to easy monetary policies in advanced economies resulted in exceptionally intense capital flows to emerging market economies. And we know that large and volatile capital inflows can potentially lead to economic and financial instability. They are associated with excessive credit expansion, lower quality of loan origination, increased financial system exposure to exchange rate risk, asset price distortions, including excessive exchange rate appreciation,  BIS central bankers’ speeches  1  and inflationary pressure, as excessively easy global monetary conditions can boost domestic demand independently from the desired domestic policy stance. In a nutshell, excessive flows are a fertile terrain to grow excessive financial exuberance. The textbook policy response for my country and other EMEs was to use its floating exchange rate regime, which helps to smooth economic and financial adjustments, while conducting sterilized interventions and international reserves accumulation, which reduces exchange rate volatility and builds a foreign currency liquidity buffer to prepare for reversals. But the intensity of this inflow episode was special as were the circumstances and policy responses in advanced economies1. Therefore, Brazil and other emerging markets pragmatically complemented their response and other textbook (aggregate demand) policies with the implementation of specific macroprudential policy measures to prevent the exuberance deriving from these large inflows to threaten financial stability.

But it is not inconceivable that we might break that record, as the Bank’s forecast, published yesterday, entails that inflation will remain below target through the early months of 2015. Inflation below target is not more desirable than inflation above target, though. In this context, we mustn’t fall into the trap of expecting monetary policy instruments to be so strong and quick-acting that inflation will always measure 2.5%, no matter what shocks hit the economy. The main objective is to keep average inflation close enough to the target over a long period of time that the target itself provides an anchor for inflation expectations and the many decisions that require an estimate of future inflation. But how close is close enough? In this context, our so-called tolerance limits for the inflation target – namely, 1% and 4% – are too wide, and it is worth noting that those limits are merely the trigger for the submittal of a report to the Government explaining how inflation will be  BIS central bankers’ speeches  1  brought back to target. In short, then, the inflation target is not 1–4%. In order to underline the control problem, I sometimes say that the inflation target is not 2.5% but 2½%. What this means is that, if we think in whole and half percentage points, a deviation of half a percentage point or less from target would be considered within the boundaries of targetlevel inflation.