Pressure on the Brazil Real to add risks to rate expectations

Brazil's Real (BRL) has depreciated nearly 6% since the last Copom meeting and it has depreciated 14% so far this quarter. The fact that the BRL remains under heavy pressure even at current levels could keep the BCB on its toes irrespective of whether or not it decides to raise rates at the September Copom. 

"As a result, despite significant downside risk (at least for this meeting), the BCB is expected to keep its options open by raising the Selic rate by 25bp (taking the Selic target to 14.50%) at the September Copom. Near-term risks to the BRL could be the key factors leading to deterioration on the inflation front and add further upside risk to the rate expectation of a pause after the September meeting", says Societe Generale. 

Not raising rates could exert further pressure on the currency and fuel acceleration in inflation expectations. Fiscal numbers should be watched carefully. In any case, monetary policy cannot be successful without fiscal and structural reforms under the current scenario. 

The success of fiscal austerity will be watched closely by the market to gauge the path of inflation expectations and monetary policy.