1. Margin of Manoeuvre of Central Banks in Preserving Stability Julio Velarde Governor Central Bank of Peru April, 7 th 2014 Palm Beach Strategic Forum

2. New conditions facing emerging market economies (EMEs) create new challenges 2010 - 2012 2013 – 2015 Recovery in developed world growth Tapering of expansionary policies in developed economies R ebalancing in growth in China External Environment Potential Impact Policy Response Slowdown in developed world Expansionary monetary policies in advance economies. Quantitative easing High growth rates in EME. China Higher long-term interest rate Decline in commodity prices Less capital flows Depreciation of real exchange rate Reduction in central bank policy rates Gradual Reversal of Macro- prudential policies. Gradual easing in fiscal position Speed up of structural reforms. Very low interests rates Persistent and abundant capital flows High terms of trade. Exchange rate appreciation Increase in central bank policy rates Quantitative tightening: higher reserve requirements, exchange rate intervention. Improving fiscal Position Additional macro-prudential policies. 2

3. However, high uncertainty on the nature of this adjustment remains: structural or cyclical? The difference between the minimum and maximum prices forecasted by the IMF (February 2014) is approximately 100%. 3

4. Preventive policy measures and strong economic fundaments provide margin for an effective policy response 4 Preventive policy measures Increase liquidity and fiscal buffers Reduce risk exposure to overborrowing and currency mismatches. Lower impact of to external shocks Increase effectiveness of policy responses Lower vulnerability to external shocks

5. Margin of Manoeuvre of Central Banks in Preserving Stability Julio Velarde Governor Central Bank of Peru April, 7 th 2014 Palm Beach Strategic Forum