Fynsa
Last week, the May Monetary Policy Meeting, which I didn’t have time to write about due to this publication’s deadline. However, after several days—and after learning the April CPI, I believe the conclusions we can draw are now somewhat more comprehensive. Contrary to what the market and we had expected, the Central Bank raised the TPM by 125 basis points, to 8.25%—a level that many of us thought would be the peak of the rate-hiking cycle. However, the surprise, the tone of the statement, and some additional data suggest a process that still has more to come.
Among the factors that explain 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 March Imacec came in higher than expected, following several rounds of disappointing data, which would have caused GDP growth in Q1 2022 to exceed estimates. However, in our assessment, it is difficult to determine a trend reversal based on a single data point that appears to reflect temporary rather than permanent conditions, especially given that the international outlook has only marginally worsened. Although the Bank likely has more information on the momentum of consumption—particularly data derived from transactions and/or electronic receipts—the rest of the data, combined with developments in the labor market, we do not believe we are in a position to say that consumption has entered a “plateau”.
Second,, the last two inflation readings were undoubtedly extremely surprising, especially when considering the monthly implied expectations 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 the projection for the end of 2022 was extremely optimistic, those surprises clearly pushed it way out of range. Was that 5.6% estimate for December a mistake? Most likely, and this was exacerbated by a monthly estimation error of that magnitude: 1.6 percentage points. Therefore, we believe that the Central Bank’s baseline scenario now does not assume year-end inflation of 5.6% + 1.6%, but rather a much higher figure, which may have impacted the maximum level to which the Council believes the TPM should be raised. However, we do not believe it is entirely correct to assume that this relationship is 1:1. The causes of inflation matter. These causes have shifted from being relatively more attributable to domestic factors to being based more on external factors, such as rising commodity prices, supply chain disruptions, and higher 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-basis-point rate hike have an impact? In other words, the rate hike didn’t surprise anyone, but the prospect of a higher U.S. interest rate—and for a longer period—than the markets had anticipated might have. I think this is a factor to keep an eye on, especially considering the effects on the currency.
For now, we need to put ourselves in the shoes of the Board members and anticipate what’s in store for the rate over the next few months. Here, it’s worth setting aside what we were thinking just a moment ago and acknowledging that the statement significantly shifted its tone, no longer suggesting that the rate-hiking cycle was about to end. Thus, the Bank could easily raise the rate to 9.5% after adjusting, once again, the monetary policy corridor it will present in the next IPoM. The interesting question will be to project how long it will remain there, considering that a significant portion of inflation in the second half of the year will have little to do with excess demand.
Let's see how much is enough.
