Brazil inflation is highly unlikely to converge on BCB target in 2017 unless we see sharp BRL appreciation, which appears highly unlikely. January inflation data came in at 10.71% y/y as against December's 10.67% y/y, above market expectations.

A combination of factors - drought in certain areas hitting supply, costlier imports following BRL depreciation, higher transport inflation-led costs and the environment of generally high inflation expectations - has led to a strong rise in food inflation, and this is unlikely to start moderating before Q2 this year given the base effect.

"The January inflation release has generated considerable uncertainty around the medium-term inflation trajectory given sharply higher food prices and the lack of clarity on further adjustments to transport prices. In fact, under no other assumption except sharp BRL appreciation we see inflation moderating to the BCB's target range by end-2017. This raises the upside risk of additional tightening in this cycle." said Societe Generale in a report.