Fynsa
Next week, the Central Bank’s Board will convene for another monetary policy meeting, this time for April. Since the supply shock triggered by the change in MEPCO parameters and the near-total pass-through of rising oil prices to domestic fuel prices, the Central Bank has adopted a defensive stance and stated that monetary policy would be evaluated on a meeting-by-meeting basis. However, it remains unclear which variables or trends will be considered when deciding whether to change or maintain the current course of monetary policy. In these brief lines, I will attempt to outline what I believe will be on the dashboard that the Board members will be reviewing when they meet.
First, given how quickly this situation could change, I believe that continued monitoring of anchored expectations will be key to keeping the MPR at its current level of 4.5%. A first test came after the release of the April Economic Expectations Survey (EEE), published following March’s inflation surprise (1.0% m/m), which raised the year-end and 12-month inflation estimates but kept the two-year forecast at 3.0%. The next EEE will be published after the April CPI is released, which is expected to be higher than March’s, due to the INE’s methodology for accounting for fuel prices. If there is another surprise, it remains to be seen whether market participants will continue to align with the central bank’s commitment or factor in that inflation will exceed their control.
Second, although this might take a little longer to become apparent, evidence of significant second-round effects (and not just expected one-time price adjustments) would put the monetary authority on alert, prompting it to take immediate action. However, we believe that for these effects to be significant, economic activity would need to enter a phase of robust expansion, which is not currently the case.
Finally, while keeping in mind that there are risks on both sides, it is possible that the materialization of various geopolitical risks, combined with the negative effects on economic activity of persistently higher oil prices, could lead to a significant slowdown in domestic demand. So much so that a significant widening of the gap could trigger deflationary pressures. In the face of such an event, an expansionary monetary policy would be necessary, which would result in a TPM lower than the current level.
As we can see, there are many factors the Central Bank is considering as it decides on its next move. The upcoming meeting will be crucial in determining which way the scales are tipping—if they are tipping at all.
