Brazil's Copom: The tightening cycle comes to an end

Today, the Copom decided to hike the Selic rate by 50bp, to 14.25%, in a unanimous decision, as consensus expected. In the post-decision statement, the board added to the previous statements messages that not only the macroeconomic outlook and inflation perspectives were considered, but also the current balance of risks. In addition, the Copom understands that keeping the Selic rate at this level (14.25%) for a sufficiently prolonged period is necessary to converge inflation to the mid-point of the target.

Most likely the Copom's models still do not show inflation at the mid-point of the target for 2016; however, when considering the balance of risks, i.e., the growth slowdown and deterioration of the labor market, the board believes that the necessary conditions to assure the convergence of inflation are set, and thereafter this was the last hike during the current cycle. 

"We no longer expect a September Selic rate hike, and, as of now, expect the Copom to only start easing by March 2016," notes Barclays.

Next week's meeting minutes will be important to shed more light on the balance of risks mentioned by Copom. If the reading from the minutes shows that keeping the Selic rate at 14.25% is a necessary, but not sufficient condition, there could be space for another hike in September, especially if the currency continues to depreciate on the back of the political noise. However, by changing the post-decision statement, the Copom wants to make it clear that this was the last hike.

As a side note, the BCB Director Volpon abstained to vote in this meeting to preserve the BCB's image, given the noise that one statement from him last week provoked. On that occasion, the director said that he would vote for an increase in the Selic until the inflation forecast is pointing toward the mid-point of the target, which senators read as a breach of the neutral and unbiased decision process-taking mode that Copom members should have.