Fynsa
During the past week, the May Monetary Policy Meeting May Monetary Policy MeetingI did not write about it due to the closing of this publication. However, after several days and, in addition, after the release of the April CPII believe that the reflections to be drawn may be somewhat more complete. Contrary to what was expected by the market and by us, the Central Bank increased the TPM 125 bp, to 8.25%, a level that many of us thought would bea level that many of us thought would be terminal in the hiking cycle. However, the surprise, the tone of the statement and some data on the sidelines would indicate that the process would indicate a process that still has something more to deliver..
Among the elements that justified the magnitude of the increase, we highlight two: activity and consumption figures somewhat more resilient than expected in the March IPoM, and the surprises seen in both the March CPI (1.9% m/m) and the April CPI (1.4% m/m).
Regarding the first point, it is true that the March Imacec surprised on the upside, after several disappointing data.It is true that the March Imacec surprised on the upside, after several disappointing data, which would have caused GDP to increase during 1Q22 above estimates. However, in our assessment, it is difficult to determine a change in trend due to a figure that seems to respond to transitory rather than permanent situations, added to the fact that the international scenario has only worsened at the margin.. Although it is likely that the Bank has more information on the dynamism of consumption, especially that which can be gathered from transactions and/or electronic ballots, the rest of the data, added to the evolution of the labor market, do not allow us to be in a position to determine a change in the trend, we do not believe that we are in a position to say that consumption has entered a "plateau"..
Secondly, the last twothe last two inflation data were undoubtedly tremendously surprising, especially when considering the monthly implied expectations in the last IPoM. the monthly implied expectations in the latest IPoM (1.0% m/m in March and 0.7% m/m in April, according to our (according to our estimates, 1.0% m/m in March and 0.7% m/m in April). If it already seemed to us that the projection for the end of 2022 was extremely optimistic, with these surprises it was clearly out of range. Was that 5.6% estimate for December a mistake? Very probably, which was exacerbated by a monthly estimation error of that magnitude: 1.6 pp. Therefore, we believe that the Central's baseline scenario now does not consider a year-end inflation of 5.6% + 1.6%, but a much higher 5.6% + 1.6%, which may have impacted the inflation rate.which has possibly impacted the maximum level that the Board believes the TPM should be at. However, to think that this ratio is 1:1 does not seem completely correct to us. The causes of inflation matter. These have been migrating from one that is relatively more explained by internal elements to one that is based more on external elements, such as the increase in raw materials, problems in supply chains and the rise in food prices. In the face of this increase, there is little the central bank can do.
Could the hawkish tone of the Fed after the 50 bp hike have played a role? In other words, the hike did not surprise anyone, but the idea of a higher US rate (and for longer) than what the markets were anticipating may have done so. I think it is a variable to monitor, especially considering the effects on the currency..
For the time being, it is necessary to put on the pants and skirts of the Councilors and anticipate what is to come for the rate in the next few months.. Here it is good to forget about what we thought a moment ago and consider that the statement changed the tone significantly, no longer realizing that the hiking cycle was about to end. Thus, the Bank could easily take the rate to levels of 9.5% after correcting, once again, the monetary policy corridor presented in the next MPI. The interesting thing will be to project how long it will remain there, considering that a determining part of inflation in the second part of the year will not have much to do with excess demand.
Let's see how much is enough.
