Copom minutes to reflect on the prevailing uncertainty on Brazil's inflation and rates

As expected, the BCB raised the Selic target by another 50bp to 13.75% at its June Copom in a unanimous decision. However, the fact that the decision came with an unchanged short statement (compared with the previous meetings in March and April) implies that the door for further rate hikes remains open, presenting considerable upside risk to th. view of no additional hikes in this tightening cycle. 

"To be fair, in the current situation when inflation is way ahead of the target rate (irrespective of the impact from the rise in administered prices), the central bank could see the need to keep raising rates. Not doing so would probably invite further pressure on the currency and a fresh round of acceleration in inflation expectations", says Societe Generale in a notes on Thursday.

However, there exists considerable uncertainty around the ability of monetary policy to bring inflation down without the help of fiscal and other reforms. Moreover, the ongoing recession, rising output gap, labour market weakening and, hence, possibility of a sharp inflation moderation next year, could persuade the BCB to keep rates at the current level.

That said, since the medium-term inflation path remains uncertain, so too is the case for the Selic rate, Societe Generale notes, the upside risk of additional rate hikes has risen post the June statement. The Copom minutes could shed more light on this uncertainty.