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In January, the Consumer Price Index increased by 0,74%, more than anticipated by the market consensus. Food and fuel price increases stood out. With this result, YoY inflation reached 2,7%.

The minutes of last week's monetary policy meeting show that the Monetary Policy Committee (COPOM) is concerned about the fact that both market inflation expectations and some of its own forecasts continue to show inflation above 4.5% at the end of 2017. Taking that into account, the monetary authority concluded that “…there is no room for the easing of monetary policy”.

The minutes of the previous monetary policy meeting showed that although concerns on inflation are declining, there is still no room for a monetary easing. We do not expect the Selic to be cut soon, but uncertainty is higher than usual as the vice-president Temer will likely assume presidential duties next week and a change in the command of the BCB is a possibility.

Even though inflation forecasts were revised upwards, the tone of the monetary policy minutes was not hawkish. The Copom refrained from signalling that either a tightening or an easing of monetary conditions is imminent. Hence, the minutes reinforced the view that the Selic rate will remain unchanged for some further time (until the end of 2016, in our opinion).

The COPOM suggested that it will increase interest rates if the fiscal situation deteriorates further, which is more likely now after the launching of the impeachment process of President Rousseff. Anyway, our base scenario is for a stable Selic ahead, which was supported by the COPOM's forecast of inflation around the target in 2017, the monetary policy relevant horizon.

The minutes of last week's monetary policy meeting confirmed that the Monetary Policy Committee (COPOM) is now focused on making the inflation converge to the 4.5% target in 2017 rather than in 2016. This change of focus takes some pressure out of monetary policy. However, the fiscal situation is a bigger source of concern, which requires the COPOM to remain "vigilant".

The COPOM refrained from using the minutes of last week’s monetary policy meeting to commit to a specific strategy ahead. Although some signaling could be provided in the inflation report at the end of June, both maintaining the Selic at 13.75% -in our view the most likely scenario- and adjusting it up again remain as possible outcomes of the next monetary policy meeting.

The minutes of last week's monetary policy meeting suggest that the tightening cycle is not over yet. According to the COPOM, the efforts to drive inflation down to 4.5% by the end of 2016 are "still not sufficient" and therefore monetary policy must remain "vigilant". We take today's minutes as a sign that the SELIC will be adjusted by 50bp to 13.75% in June.