The potential catalysts in the Brazil's monetary policy outlook

An important mover could be a change in the Brazil's inflation target. Tomorrow, the National Monetary Council (CMN) will meet to reaffirm the 2016 target and announce the 2017 target. 

"The CMN could either increase the inflation target to 4.5% for 2016, and simultaneously announce a lower one for 2017, or reduce the tolerance range for the 2017 inflation target, but keeping the mid-point at 4.5%, or bring no change to the current setup prevailing since 2004 of the mid-point of 4.5% and target range of +/- 2.0pp", says Barclays.

It will be decided on 26 June to define what to expect in terms of monetary policy. If there is no change at all, we think the Copom will hike the Selic by another 75bp (50bp in July and 25bp in September), but the subsequent easing could come by the end of Q1 16, given that inflation expectations are already close to the mid-point of the target for 2017 onward, and, therefore, would allow an earlier easing of the Selic rate at 14.50%. 

The board will likely want to be sure there is no shock to the inflation outlook that could move the IPCA beyond the new tolerance range. 

Finally, if the council decides to increase the 2016 inflation target and define a lower target for 2017, we believe the Copom will likely hike by 25bp in July and, depending on the behavior of inflation expectations for 2017, it would hold interest rates for a period even longer than Q2 16.