Brazil's Q4 FY16 inflation likely at 5.3%

Although the BCB does of course have other tools at its disposal, in terms of the SELIC policy rate, the Bank's hands are somewhat tied given the general government nominal balance deficit which stands at close to 10% of GDP while the interest bill on public debt stands at 9%. 

Moreover, the share of public debt closely attached to the policy rate is high. First, there is around BRL 850 bn (approximately 14.9% of GDP) of short-term repos placed by the BCB to control short-term liquidity. 

Additionally, another BRL 191 bn (3.3% of GDP) of federal debt is based on floating rates if the net fixed leg is discounted from FX swap positions. Second, the average maturity of domestic federal securities is around 53 months according to National Treasury data from August.

The BCB has already been under scrutiny following the release of its Q3 Inflation Report (IR) on 24th September as a result of the increased inflation forecast for Q4 2016 at 5.3% up from 4.8% in the Q2 IR. 

"At that time, inflation expectation remained broadly under control. Our indicator tracker for Copom Meetings, highlights that from September 2nd to October 16th a broad deterioration in expectations and data were observed", says Rabo Bank.