Fynsa
After continuous interest rate hikes, each one more aggressive than the previous one, with false expectations that it would now slow down the pace of increases and a bunch of other surprises in that sense, the Central Bank has reportedly put a pause to this cycle of continuous rate hikes that started in the middle of last year, the Central Bank is said to have put a pause to this cycle of continuous increases that began in the middle of last year. Thus, the rate went from 0.5% to 11.25%, that is, from a tremendously expansive monetary policy to probably the most contractionary we have seen since the return to democracy.
Undoubtedly, the question that immediately comes to mind is why he decided to end the process at this time. why did you decide to end the process at this time?. With the publication of the minutes of that meeting we can dig a little deeper into the reasons behind this decision.
First, while monthly inflation remained monthly inflation remained high and year-on-year and the year-on-year figures had exceeded those projected in the last IPoM, it is also true that these were beginning to recede and the outlook for the more volatile items did not appear to show the increases of previous months. In fact, in some cases, In fact, in some cases, these prices were beginning to show some setbacks, mainly in the case of some foodstuffs. In addition, certain cost indicators, such as maritime freight rates or even the exchange rate, continued to fall or, in the case of the parity, was no longer influenced by internal weakness, but rather by the global strength of the dollar, which meant very different price pass-throughs.
Second, despite the recent improved performance of the services sector, overall activity continued to exhibit weakness, which should continue going forward. Sectoral indicators ratified this view, which was in line with the fall in private projections. The international economy, meanwhile, also confirmed weakness, in a context of high inflation, less impulse from monetary policy and relevant geopolitical risks.
Thirdly, the financial sector also confirmed this lower expansiveness, with setbacks in credit indicators, greater difficulty in accessing credit, higher market rates and falls in equities. Despite skeptics, the economy is indeed making the adjustment in line with the Central Bank's objectives, which, sooner or later, would have an impact on inflation.
This idea that the contractionary monetary policy reduces prices, although it may seem half-obvious, is what has been the basis for our less inflationary position than the market in terms longer than one year and, therefore, for a lower TPM than the one implicit in financial assets for that same horizon. With that in mind, the Board decided to put an end to the monetary tightening (or, at least a pause with the information available so far) and the important question that arises is until when. Will it be a short pause, with a downward cycle starting once 2023 begins, or a somewhat longer one that will require information on its scope for at least two more quarters?
Our view is in favor of the second option, since in the event that indicators begin to show unequivocally that prices have started to normalize, one could opt for more aggressive adjustments versus the risk of starting earlier and then having to pull back. The important thing is that, now, we have to focus on the next question.
