Foreign Exchange Intervention in Latin American Countries with Inflation Targets

IMF News, March 8, 2019

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Speech by David Lipton, IMF First Deputy Managing Director, delivered in Mexico City on March 8, 2019.
Launches a new IMF book compiling experience on foreign exchange intervention in Latin America within inflation-targeting regimes.
Motivation: heightened uncertainty in the global economy, including trade tensions and financial market volatility that sparked episodes of capital outflows from emerging market economies.

The book situates foreign exchange (FX) intervention within a broader toolkit that includes:
- Monetary policy
- Exchange rate policy
- Macroprudential policy
- Capital flow management policies
Purpose: to think about complementarities and trade-offs across these tools in a more integrated way.
Historical context: since the 1990s, most large Latin American economies transitioned to inflation targeting with flexible exchange rates, sometimes after crises that exposed the shortcomings of pegged regimes.

Motivations for reserves accumulation and intervention:
- Building buffers against shocks
- Counterbalancing sustained capital inflows following the commodity super-cycle and advanced-economy monetary stimulus after the global financial crisis
- Countering depreciation pressures
Modes of intervention observed:
- Rules-based frameworks in some countries
- Ad hoc, discretionary interventions in others
- Direct spot market intervention to accommodate immediate FX liquidity needs
- Derivative-based intervention where FX market pressures reflected hedging demand
Contributions to the book:
- Fund staff wrote introductory chapters
- Experts from seven Latin American central banks contributed summaries of their countries’ intervention policies, goals, and outcomes

Benefits of rules-based intervention relative to discretionary intervention:
- Example highlighted: Mexico has used mechanisms to:
- Accumulate reserves
- Reduce the pace of reserve accumulation through oil revenues
- Address disorderly conditions in the foreign exchange market
Importance of transparency and communications:
- Strong communications policies reduce exchange rate volatility and market uncertainty
- Transparency helps avoid undermining the credibility of the inflation target
- Communications value applies beyond Latin America and parallels lessons from advanced economies’ unconventional monetary policies
Value of institutional learning:
- Compiling decision-making processes of central banks is instructive for cross-country learning and improving policy design

Treat FX intervention as part of an integrated policy framework, not as a standalone tool.
Favor clear, rules-based intervention mechanisms where appropriate to enhance predictability and effectiveness.
Strengthen transparency and communications to limit adverse effects on inflation-target credibility and to reduce market uncertainty.
Use a mix of instruments (spot and derivatives) tailored to the nature of FX market pressures, including hedging-driven pressures.
Encourage institutional collaboration and documentation of decision-making processes to improve collective understanding and policymaking.

The compiled experience in the book is a timely contribution to policy discussions amid global uncertainty.
The region’s experience highlights both successful practices and areas where understanding remains limited, motivating further debate and research.
The speaker expects today’s discussions to deepen understanding and help strengthen defenses against instability and disruption.

Source: David Lipton, IMF First Deputy Managing Director; speech delivered Mexico City, March 8, 2019.