Projecting the Central Bank of Brazil's action continues to be very challenging due to the deep stagflation scenario. There are arguments on both the front regarding if the central bank will resume the cycle of tightening or not. The Brazilian economy has shrunk sharply, whereas inflationary expectations and inflation have continued to rise in spite of significant tightening in the past three years.

It becomes much difficult to anticipate when there is considerable doubt regarding the independence of central bank. The BCB's credibility has been lacked in some occasions in the past many years. There has not been much of a change since then. Moreover, the stagflation has intensified in Brazil.

The inflation data in 2016 so far has raised doubt regarding the medium-term inflation trajectory due to food prices rising sharply and ambiguity regarding further adjustments to transport prices. Inflation is not expected to moderate to the central bank's target range by the end of 2017 under any assumptions except for a sharp appreciation of the Brazilian real. However, with the current fiscal scenario in the nation, sharp appreciation of the BRL is very much unlikely if there is no improvement in commodity prices and external demand.

There has been an increase in confusion as certain news reports imply that the central bank might lower rates later in 2016 to boost growth. However, such a possibility is unlikely. The case for continued tightening of the policy still exists, but it is very much unlikely that the central bank policy makers will pay attention to this requirement on the inflation front.