1

Pine Technical report: CDI versus TJLP, volatility versus trend July 25, 2012

In contrast to the period prior to the crisis in 2008 when the Brazilian Central Bank´s main

concern was the excessive growth of the economy and the subsequent rise in inflation, the

government´s attention has now turned to the weakening of GDP and gross private

investments. These two variables, along with the slowdown in inflation measured by the IPCA

amplified consumer price index, are among the main forces behind the fall in the Selic rate

and, in turn, the CDI, which is shown in the following two graphs.

Selic, GDP growth and change in gross investment

Source: Central Bank and IBGE. Production and projections: Pine Research

The two graphs above show clearly that the government sees the fall in the Selic as a means

of stimulating GDP growth, particularly by expanding gross private investments and corporate

credit.

In this situation, the variation in the CDI, which is strongly correlated to alterations in the

Selic, is not lagging behind. The annualized CDI has been converging gradually closer to 7.5%

which, according to our estimates and the market consensus, is the lowest level the Selic rate

will reach in 2012. The two rates should remain at this level for a good time while gross

private investments and GDP have shown no stronger rates of growth and came close to 10%

and 4.0%, respectively.

As for boosting GDP through private investments, the long-term interest rate (TJLP) also

enters into consideration. At the end of the day, if there is a benchmark interest rate for

private investments, which are long-term decisions, it has to be as low and stable as possible

and there is no doubt that the TJLP plays this role.

Its current level of 5.5% a year is a record low and, as the following first figure shows, the

TJLP (annualized) is similar to the trend line of the CDI (also annualized). This confirms the

stability of the TJLP compared with the CDI and can also be seen through the volatility

measures of the two curves described in the second figure below.

-2

0

2

4

6

8

10

5

10

15

20

25

30

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Selic LTM (left)

Annual GDP (%, right)

0%

5%

10%

15%

20%

25%

30%

-10%

-5%

0%

5%

10%

15%

20%

25%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013/15

Investments Selic

Investments Average Selic (ann.)

2

CDI and TJLP: trends and respective volatility levels

Source: Central Bank; production and estimates: Pine Research

The reasons for such a big difference in volatility are due, simultaneously, to the persistence

of annual consumer inflation at between 4.5% and 5.5% and the subsequent discrepancy

(positive) between the average inflation over 12 months measured by the IPCA index and the

current center of the inflation target (4.5%) and, finally, to the difference (also positive)

between the expectations for inflation in the 12 months ahead at the center of the target.

The first graph below confirms how the deviations of actual consumer inflation and the

expectations for inflation in the coming 12 months in relation to the center of the target

influence the path of the CDI and its volatility, even more so when both measures are

compared to the same framework of the TJLP.

Source: Central Bank; production and estimates: Pine Research

8

11

13

16

18

21

23

26

5

6

7

8

9

10

11

12

13

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Annual TJLP (%, left)

CDI rate LTM (%, right)

-2

0

2

4

6

8

10

5

10

15

20

25

30

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

CDI rate LTM (%)

Inflation target deviation (%, right)

-2

0

2

4

6

8

10

5

6

7

8

9

10

11

12

13

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Annual TJLP (%, left)

Inflation target deviation (%, right)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-0

3

Aug-0

3

Mar-

04

Oct

-04

May-

05

Dec-

05

Jul-

06

Feb-0

7

Sep-0

7

Apr-

08

Nov-

08

Jun-0

9

Jan-1

0

Aug-1

0

Mar-

11

Oct

-11

May-

12

Desvio-padrão % CDI (12 meses)

Desvio-padrão % TJLP (12 meses)

Standard deviation % CDI (12 months)

Standard deviation % TJLPI (12 months)

3

In other words, the risk of a positive deviation from expectations of the variation in the IPCA

from actual consumer inflation in relation to the center of the target sets a floor for the CDI

at between 7.0% and 7.5% and the possibility of it rising, accompanying any possible increase

in the Selic rate to 8.5% from 2014. This outlook would only be possible if Brazilian GDP

started to grow again close to 4.0%, the European crisis lost force and, finally, if Brazil´s

consumer inflation were to return to between 5.5% and 6.0%. In the specific case of inflation

measured by the IPCA index, its rise would accompany: (i) an expansion of domestic demand;

(ii) an acceleration of the positive variation in prices of agricultural and non-agricultural

commodities in response to the greater world economic growth; and (iii) the resurgence of

inflation from domestic services which always accompany the real growth faster than

domestic demand.

For its part, the TJLP, the function of which is to finance and encourage the domestic capital

goods industry, including trucks, tractors and agricultural machinery, usually remains

between 5.0% and 5.5% in the long term. The aim is to promote the real annual expansion of

the gross formation of fixed capital by 10%, even though the fiscal burden of this subsidy in

relation to market rates costs the central government more than R$5.0 billion a year.

Marco Antonio Maciel Chief economist

Banco Pine

Marco Antonio Caruso Economist

Banco Pine

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