Fynsa
No major surprises were expected in the December Monetary Policy Report. The decision to keep the rate unchanged and the changes to the projections were in line with expectations. However, there was some curiosity to see how the future conduct of monetary policy might change, especially given that the market had revised its estimates so rapidly.
Quite a few clues had already been provided in the statement from the Monetary Policy Meeting, held the day before the report was published. There, it was stated quite explicitly that “The Council will maintain the TPM at 11.25% until macroeconomic conditions indicate that this process (the resolution of current economic imbalances) has been consolidated.” But what does that mean?
Over the years I’ve been analyzing Central Bank statements, I’ve grown accustomed to the Bank always attempting to describe its future actions based on inflation trends, always with a focus on bringing inflation in line with its target over the policy horizon. It’s all quite standard. Therefore, this broadening of criteria leaves the possibilities for the TPM much more open. Undoubtedly, these macroeconomic imbalances include price fluctuations, but also the troubling current account deficit, financial conditions, and international trade. Without a normalization of these “fundamental” imbalances, it is unlikely that the Council will give the green light to a cycle of rate cuts.
But it is also a nod to other “imbalances.” It is very important that all stakeholders work together to bring inflation under control, which is a relatively fragile balance fraught with risks. Further fueling spending, in any form, would make the path to achieving this goal far too difficult—not only in terms of prices, but perhaps also by causing irreparable harm to the well-being of those of us who live in this country.
With this, it seems to us that the Central Bank is adopting a “wait-and-see” approach. And not just waiting for one or two more inflation readings, but taking a much broader view and gathering more evidence that the adjustments are actually taking place. Thus, we find it difficult to imagine that happening during the first half of next year, given the frequency with which the relevant figures are released. Given the above, we believe that an initial move should occur in July or September.
