Brazil's inflation likely above target range

Following a hawkish Quarterly Inflation Report, BCB still forecasts inflation above the center of the, now tighter, 3.5-5.5% inflation target range. 

According to RBC Capital Markets, "We therefore expect a 50bp hike on July 29 and a 25bp hike on September 2. These will bring the tightening cycle to an end at 14.5%. Meanwhile, we believe the central bank will continue to reduce the pace of the USD swap book rolls to zero by September. This should bring the USD swap book to about USD 60-70bn by the end of 2015, from USD 110bn now. We believe a tight monetary policy stance but an unwind of the USD swap book will bring USD/BRL to 3.35 by September. The carry remains attractive but we believe the currency will underperform the 3-month forwards, now at 3.23, by 3-4%."

The activity picture is quickly deteriorating and with it, the fiscal outlook. MinFin Levy has been working hard to reduce the fiscal gap, but tax revenues' deterioration is inevitable as the economy de-leverages. RBC Capital Markets estimates GDP growth at -2.5% to -3%  for this year, against -1.45% for the last BCB Focus report.