The Central Bank of Brazil kept the Selic rate unchanged at 14.25%. The majority of the board voted to leave the rate unchanged, while two members voted for a rate hike by 50bp. According to the board, the decision to keep the rate stable was taken after assessing the macroeconomic situation, current balance of risks, inflation prospect and taking into account the increased uncertainties in the domestic and external side. The drop in commodities prices, instability in market from Asian markets and slowing of China's economy might have compelled the board to include the increasing uncertainties from external side.
The central bank is expected to begin easing policy by August 2016, lowering the interest rate to 13% by the end of the year as the recession intensifies, continuous decline of domestic conditions and expected material downside risks emerging from international scenario.
The central bank is not able to do much as the nation is shifting towards a fiscally dominant regime and hence the inflation targeting regime has been challenged. This has led to a change in the central bank's reaction function, depressing the monetary policy's effectiveness to curb inflation and discouraging market expectations of rate hikes.
