Fynsa
During last week, we had relevant news that, due to the holiday prior to the weekend, we did not have time to comment on. The Central Bank Board unanimously decided to cut the Monetary Policy Rate by 50 bp to 9.00%. Although a cut was expected, and part of the normalization process, the market (and us) was forecasting a larger cut (75 bp), based on the communication that the Board has been delivering in several instances. In fact, this decision makes it difficult to reach the 7.75%-8.00% that the Central Bank had recently indicated as the rate level for the end of the year.
We do not think it is necessary to give too much thought to the fact that the fundamental reason for only lowering the peso by 50 bp was to avoid The main reason for the 50 bp decrease was to avoid further pressure on the peso and to lessen the harmful effects that the rapid depreciation of the currency has had on local markets. In addition, In addition, it announced that it was suspending the reserve accumulation program and reducing its forward position, This could not have been otherwise, in order to give coherence to the previous decision.
Although it was unanimous, we do not believe that it was an easy decision, nor was it free of difficulties. Moreover, although it is a casuistic fact, I have never seen financial stability objectives pursued through the MPR. Never. For this, the institution has other less indirect instruments and tools, which have been used on other occasions. It seems that the market's cock-and-bull game paid off.
I mention this because, when analyzing the statement, we only find reasons to maintain the pace of cuts or even increase them, if the faster inflationary reduction is considered (beyond the increase in volatile components). Consistent with what was stated in the last IPoM, in conjunction with the price stability objective, the economy needs less rate, not more. Additionally, the same tighter financial conditions, not only external but also local, have made, through market rates, monetary policy more contractionary.
Therefore, trying to evaluate this as a "tactical pause", we believe that these lower cuts would only be transitory, awaiting a less convulsive context. For the same reason, on this occasion the forward guidance of the previous meeting, which anchored the expected TPM at a limited range for the end of the year, was not maintained. Did you not want to give this information or were you unable to do so, given the tremendous uncertainty of the current scenario?
In the end, if this story continues, it is difficult to anticipate a cut other than 50 bp in December. But this does not change our view of the monetary normalization needed by 2024, which would not be so gradual and may require more aggressive action to avoid arriving too late at the level of rates that the economy needs.
