Improvement in Brazil Real outlook crucial to stabilize inflation and rate expectations

Brazil Real (BRL) appreciation would damage the scope of the manufacturing revival, as it will cause exports to be expensive. With inflation currently well ahead of the target rate, the central bank could feel obliged to keep raising rates. Societe Generale expects the BCB to raise the Selic rate +50bp to 14.25% at the July Copom meeting, leading to total tightening of 700bp in this cycle since April 2013. 

Moreover, given the inflation uncertainty, the upside risks to their cyclical peak Selic rate forecast of 14.50% continues to rise, says SocGen. Not doing so would probably prompt further pressure on the currency and another round of acceleration in inflation expectations. 

A significantly high bank rate (such as in 2004-06 when it was raised to 19.75%) could theoretically help the BRL to stabilize and inflation to normalize, things are not all going to be that easy during such macro/fiscal scenario. Moreover, it's not even clear if Brazil should target appreciation of the real at this stage even if it appears to be the surest way of taming inflation in the medium term, adds SocGen.