BCB minutes likely to highlight medium-term inflation expectation, unlikely to ease policy in 2016

The Central Bank of Brazil, as expected, kept the interest rate unchanged at 14.25%. The board had voted 6-2 to hold the rates. Two members asked for a rate hike of 50bp. The central bank's language remained the same as compared with its earlier meeting. However, the dissenters continue to recognize the upside threats of further rate rise in this cycle with the continued acceleration in medium-term inflation outlook. It seems that the declining growth outlook and external uncertainty has driven the rate decision at the moment.

The final statements regarding the additional tightening during this cycle are probably not been released yet. The central bank can return to its stance after observing the extent of inflation moderation in the coming few months before considering further rate hikes under the current growth scenario.

That said, the stance of BCB seems to imply that unless things alter considerably in terms of growth or inflation, the upside threats of additional  monetary tightening is 2016 will continue to reduce. With the increase in inflation expectations, the upside risk that interest rates might continue to be higher for a longer period of time has increased. The upcoming Copom minutes are expected to further underline the central bank's view regarding the medium-term inflation expectations. The BCB, at the moment, is not likely to ease policy in 2016.