Fynsa
Last week, the May Monetary Policy Meeting, which I was unable to write about due to the publication deadline. However, after several days and after learning the April CPI, I believe that the conclusions to be drawn can be somewhat more complete. Contrary to what the market and we expected, the Central Bank raised the MPR by 125 basis points to 8.25%, a level that many of us thought would be the end of the cycle of increases. However, the surprise, the tone of the statement, and some marginal data suggest a process that still has more to deliver.
Among the factors that justified the magnitude of the increase, we highlight two: activity and consumption figures that were 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 Imacec for March surprised on the upside, after several disappointing figures, which would have caused GDP growth in Q1 2022 to exceed estimates. However, in our assessment, it is difficult to determine a change in trend based on data that appears to respond to situations that are more transitory than permanent, added to the fact that the international scenario has only worsened marginally. Although the Bank is likely to have more information on the dynamism of consumption, especially that which can be gathered from transactions and/or electronic receipts, the rest of the data, added to the evolution of the labor market, we do not believe we are in a position to say that consumption has entered a "plateau.".
Secondly, the last two inflation figures were undoubtedly extremely surprising, especially considering the monthly expectations implied in the latest IPoM (according to our estimates, 1.0% m/m in March and 0.7% m/m in April). If we already thought 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? Most likely, which was exacerbated by a monthly estimation error of that magnitude: 1.6 pp. Therefore, we believe that the Central Bank's baseline scenario now does not consider year-end inflation to be 5.6% + 1.6%, but much higher, which may have impacted the maximum level that the Council believes the MPR should reach. However, we do not believe that this relationship is entirely 1:1. The causes of inflation matter. These have been shifting from inflation that is relatively more explained by internal factors to inflation that is based more on external factors, such as increases in raw material prices, problems in supply chains, and rising food prices. In the face of this increase, there is very little the Central Bank can do.
Did the Fed's more hawkish tone following the 50 bp hike have an influence? In other words, the hike came as no surprise, but the idea of a higher US rate (and for longer) than the markets had anticipated may have done so. I think this is a variable to monitor, especially considering the effects on the currency.
For now, we must put ourselves in the shoes of the Council members and anticipate what will happen to the rate over the coming months. Here, it is good to forget what we were thinking a moment ago and consider that the statement significantly changed its tone, no longer indicating that the cycle of increases was about to end. This way, the Bank could easily raise the rate to 9.5% after correcting, once again, the monetary policy corridor presented in the next IPoM. The interesting thing will be to project how long it will remain there, considering that a significant part of inflation in the second half of the year will not have much to do with excess demand.
Let's see how much is enough.
