Brazil rates – The price of restoring credibility

Prior to last year's presidential election, the BCB was the target of much criticism for diluting its monetary discipline and not raising policy rates more decisively in 2014. Since then the BCB has recharged its commitment to beating down inflation, raising the SELIC rate 225bps since last October despite clear signs the economy is heading into recession. 

Aggressive fiscal and monetary tightening leaves little room for growth to flourish and is the price for regaining lost credibility. The BCB has yet to soften its hawkish stance and continues to reiterate the need for vigilance in anchoring inflation expectations. 

Inflation this year will likely remain substantially elevated versus the BCB's 6.5% target ceiling, boosted by adjustments to administered prices. But inflation expectations have been forced down, with 12- month expectations falling to nearly one-year lows of 6%. 

With the BCB underscoring its intent to bring inflation down to 4.5% by end-2016, it is suspected that the BCB is not quite done yet. Key words such as "vigilance" and "perseverance" remain staples in recent BCB commentary, which is interpreted as a signal that policy rates have yet to peak. 

"We expect the 3 June COPOM meeting to bring a 50bps SELIC hike, followed by another hike at the 29 July COPOM meeting. We think this cycle's peak is approaching following June and July's expected tightening", says Standard Chartered.