This report compares the CDI (Certificado de Depósito Interbancário), an overnight interest rate in Brazil, to the TJLP (Taxa de Juros de Longo Prazo), a long-term interest rate. It finds that while the CDI has fluctuated more due to deviations in inflation from targets, the TJLP has remained stable between 5-5.5% to encourage long-term private investments. Lower interest rates through the Selic rate and CDI aim to stimulate Brazil's slowing GDP growth by expanding private investments and credit. The report provides graphs and analysis showing the relationship between these interest rates, inflation, and economic growth in Brazil.

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
Investments Average Selic (ann.)
30 10 25% 30%
Investments Selic
20% 25%
8
25
15%
6 20%
20 10%
4 15%
5%
15
2 10%
0%
10
0 -5% 5%
5 -2 -10% 0%
2013/15
1999
2000
2001
2002
2003
2005
2006
2007
2008
2009
2010
2011
2012
2004
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Selic LTM (left)
Annual GDP (%, right)
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.
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2. CDI and TJLP: trends and respective volatility levels
13 4.5
26 4.0
12
23 3.5
11
21 3.0
10
2.5
9 18
2.0
8 16
1.5
7 13 1.0
6 11 0.5
0.0
5 8
Aug-03
Aug-10
Apr-08
Jan-03
Jan-10
Jun-09
May-05
May-12
Sep-07
Jul-06
Mar-04
Mar-11
Feb-07
Dec-05
Nov-08
Oct-04
Oct-11
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Annual TJLP (%, left) Desvio-padrão % CDI (12 (12 months)
Standard deviation % CDI meses)
CDI rate LTM (%, right) Desvio-padrão % TJLP (12 meses)
Standard deviation % TJLPI (12 months)
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.
30 10
13 10
12
8 8
25
11
6 6
20 10
49 4
15 8
2 2
7
10
0 0
6
5 -2
5 -2
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
CDI rate LTM (%) Annual TJLP (%, left)
Inflation target deviation (%, right) Inflation target deviation (%, right)
Source: Central Bank; production and estimates: Pine Research
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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 Marco Antonio Caruso
Chief economist Economist
Banco Pine Banco Pine
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