Banco Central do Brasil (BCB) surprisingly left rates unchanged at 14.25% at yesterday's monetary policy meeting. The expectation had been for a rate hike of 50bp. The decision raises questions regarding the central bank's autonomy, and is likely to further undermine credibility in policy making.

The signals and guidance sent by the BCB before the meeting had been hawkish and expressed a need to bring inflation down to the 4.5% midpoint-target in 2017, why the decision to stay put took markets by surprise. The Q4 inflation report released from the BCB in December expressed a challenging inflation outlook and inflation closed 2015 significantly above the target at 10.7%.

IMF on Wednesday revised down their growth outlook for Brazil to -3.5% for 2016. BCB President Tombini in a press release on Tuesday commented the revision as significant and highlighted in his statement that all available information up to the Monetary Policy Committee meeting will be considered in the decision of the board. Some market participants interpreted this as dovish signals and Brazil's interest rate futures rate fell sharply after the statement.

Yesterday's decision raises questions regarding the BCB's autonomy. President Rousseff's PT-party has expressed criticism over monetary policy and of higher rates.

The decision to keep rates on hold after BCB's recent hawkish guidance ahead of the meeting and the challenging inflation outlook is beset with risks and is likely to further undermine confidence in the authorities' policy making and to lead to additional pressure on the BRL.

"We expect the USD/BRL to continue to face weakening pressure in the near term driven by general risk-off sentiment and falling commodity prices. Continued intervention by the BCB in the FX market is supporting the currency from too excessive weakening. Beyond the near term we see very moderate strengthening as external pressure eases.", says Nordea Research.

The statement after the meeting was very brief, considering the macroeconomic outlook and the perspectives for inflation and the actual balance of risks, and considering the increase of domestic and primarily, external, uncertainties, Copom decided to hold the Selic rate at 14.25 percent. Two members voted for a 50bp hike (the same two as on the November meeting) and 6 members voted for unchanged