Brazil is going through a painful adjustment process

The government's effort on fiscal austerity is surely an essential step to restoring the confidence of investors. Achieving fiscal objectives is very difficult in a contracting economy and, clearly, the government does not have the fiscal room to initiate an investment cycle to help the economy grow. 

"In the medium term (next 2-3 years), we do not see the government successfully restoring the fiscal house or improving investor confidence in so far as it is lower due to the worsening fiscal balance", notes Societe Generale.

The government's best option seems to be the difficult path of rebalancing - by focusing on fiscal savings even at the cost of letting growth suffer and by letting the currency adjust to a new level even at the risk of stocking higher inflation in the near term (say 2016 and to some extent 2017). This will continue to raise the upside risk to the Selic rate irrespective of the BCB's stance of holding rates unchanged. The financial market movements have not left the policymakers with any other option except adjustments in the fiscal and external space.