Fynsa
The market has been divided. During the last few days, a debate has been generated regarding how the Central Bank Board should act at the December meeting. While some are projecting a further 25 bp cut in the policy rate, others believe that cuts should wait and a pause in the cycle would be reasonable.
We believe that these different views are mainly based on the reading of recent local inflationary data (October +1.0% m/m) and the election of Donald Trump as president of the United States, which could affect the speed of normalization of monetary policy by the Federal Reserve (FED). The latter, considering that certain proposals made by the former candidate would have an inflationary impact, according to estimates from different sources.
Although we agree with the risk that the latter could pose and that, considering the recent management, a more cautious FED at the moment of continuing its cuts could influence the management of the local rate, we do not agree with the assessment made on the recent inflation data.
We have already analyzed the CPI figures in this space, but in case the reader did not have the opportunity, a brief summary: inflation has been converging to 3.0% and -so far- any deviation in that trajectory is due to two elements: the increase in electricity rates and the increase in the price of food, especially fresh fruits and vegetables.
In this respect, the Central Bank has little to do in the face of these shocks. shocksThe first is caused by decree and causes discrete increases, while the second is by definition one of "supply", especially related to climatic events. But that is not all. So far, there is no evidence of second round effects (at least not significant) or resurgence of inflationary pressures. Moreover, when analyzing activity figures, especially demand, we realize that its weakness is key to explain the limited pass-through that tariff hikes or exchange rate depreciation may possibly have to final prices. The latest Business Perceptions Report supports this thesis, mentioning that there is less room to increase prices, mainly due to the low dynamism of sales.
Given this scenario, to which we can add expectations anchored at 3.0% in spite of all the shocks shocks recent shocks, the Central Bank has room to continue its cycle of cuts aimed at reaching neutrality. It is true that this process does not necessarily have to be linear and/or continuous, but taking into account that the September IPoM scenario is still valid and credible, we do not see a reason for the "stance"policy stance should be modified, at least not in the short term.
Thus, we project a further 25 bp cut at the December meeting, which would end 2024 at 5.0%. As we estimate the neutral rate at 4.25%, three more cuts should occur during the first half of next year, with room for some pauses only if needed due to the economic situation.
