BCB revised its policy rate

On 3 June, the BCB hiked its policy rate (SELIC) by 50bps to 13.75%, reaching 275bps of cumulative tightening since October 2014. Before 2014's presidential election, the BCB was much criticised for falling behind the curve regarding capping inflation, damaging its policy credibility. BCB actions this year suggest it is back to take care of unfinished business, with renewed resolve to put the inflation genie back in the bottle, even if it means exacerbating this year's recession. 

Minutes of the 3 June COPOM meeting underscored the BCB's focus on bringing inflation down to its 4.5% target by end-2016. Inflation expectations are not falling as quickly as the BCB would like - recent inflation prints surprised on the upside in May, leaving the BCB with significant work ahead. 

According to Standard Chartered, "the BCB is not done, and is likely to continue at its current 50bps tightening clip. A 50bps hike is expected at the 29 July COPOM meeting, and likely another 50bps after this, taking the SELIC rate to 14.75% (from 14.00% previously)".

The next key event to watch is the BCB's Q2-2015 quarterly inflation report (QIR) due at the end of June, which will bring detailed quantitative inflation projections two years out. In the Q1 QIR, the BCB's estimate for 2016 year-end IPCA was 4.9%. For the Q2 QIR, the cut-off date for model inputs is probably mid-June, which suggests BCB inflation projections are likely to be very similar to those in the latest minutes; no major changes is expected in projected 2016 inflation in the Q2 QIR, added Standard Chartered. 

The BCB's aim to reduce inflation expectations remains particularly difficult. Historically, there is a high correlation between medium-term inflation expectations and (1) current inflation, and (2) USD-BRL.