COPOM : Currency selloff not significant enough to keep hiking

Today, the Copom decided to keep the Selic rate at 14.25%, pausing the hiking cycle that it resumed in October 2014 in a unanimous decision, as consensus expected. In the post-decision statement, the board kept the same statements of the previous meeting, saying that the decision was taken after evaluating the macroeconomic outlook, inflation perspectives and current balance of risks. In addition, the Copom continues to believe 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.

The recent developments in China and financial markets crystallize the central bank's dilemma: on the one hand, the exchange rate has weakened 19.6% since the beginning of July and fiscal policy has been looser than previously expected, threatening to de-anchor inflation expectations and arguing for a vigilant approach to monetary policy. On the other hand, the swift deterioration of the labor market and Brazil's growth outlook, echoed by global developments, could argue for a more dovish stance, backed by the deceleration of monthly inflation prints throughout the third quarter.

"Our view is that inflation forecasts are not yet "significant" above the ones considered in the previous meeting, a condition the Copom set in order to raise the Selic rate. That said, we believe that the lag in which the above variables play out in the inflation scenario is important in determining the probability of delay or anticipation of the monetary easing relative to our current expectation of a cut in March 2016", says Barclays.

The meeting minutes, released next week, and more importantly, the Quarterly Inflation Report (QIR) will be important to access how slowly the convergence of inflation to the midpoint of the target is being considered in the Copom's view.