Will the BCB hike rates?

The minutes to last week’s central bank meeting in Brazil raised the possibility that policymakers will respond to the worsening inflation outlook by hiking interest rates. And despite the sharp shift down in US interest rate expectations since that meeting, markets still appear to be partly pricing in a hike in Brazil. For now, our central scenario is that rates will be left on hold for a prolonged period. But further sharp falls in the real and a material worsening in the inflation outlook could force Copom to act – although we suspect it would intervene in the FX market before lifting the Selic rate.