Fynsa
Last week, we received some important news that we were unable to discuss due to the holiday before the weekend. The Central Bank’s Board unanimously decided to cut the monetary policy rate by 50 basis points, bringing it to 9.00%. Although a cut was expected—and part of the normalization process—the market (and we) had forecast a larger reduction (75 basis points), based on the guidance the Board has been providing on various occasions. In fact, this decision makes it difficult to reach the 7.75%–8.00% range that the Central Bank had recently indicated as the target rate for the end of the year.
We don't think there's much to debate about the fact that the fundamental reason for cutting rates by only 50 basis points was to avoid putting further pressure on the peso and to mitigate the harmful effects that the currency’s rapid depreciation has had on local markets. Additionally, it announced that it was suspending the reserve accumulation program and the reduction of its forward position, which was the only logical course of action to ensure consistency with the previous decision.
Although the decision was unanimous, we do not believe it was an easy one or one free of difficulties. Moreover, although this is an anecdotal observation, I have never seen financial stability objectives pursued through the MPR. Never. To that end, the institution has other, less indirect instruments and tools at its disposal, which have been used on other occasions. It seems that the market’s little game paid off.
I mention this because, when analyzing the statement, we find only reasons to maintain the pace of rate cuts or even accelerate them, if we take into account the faster decline in inflation (beyond the rise in volatile components). Consistent with the analysis in the latest IPoM, and in line with the price stability objective, the economy needs lower interest rates, not higher ones. Additionally, the tighter financial conditions—not only external but also domestic—have made monetary policy more contractionary through market rates.
Therefore, in an effort to assess this as a “tactical pause,” we believe that these smaller cuts would be only temporary, pending a less turbulent environment. For this reason, the forward guidance from the previous meeting—which anchored the expected year-end TPM within a narrow range—was not maintained this time. Did the central bank not want to provide this information, or was it unable to do so, given how tremendously uncertain the current situation is?
In short, if this trend continues, it’s hard to see a rate cut of less than 50 basis points in December. But this does not change our view regarding the monetary normalization needed by 2024, which would not be so gradual and may require more aggressive action to ensure we do not arrive too late at the interest rate level the economy needs.
