Fynsa
Finally, our Central Bank began the process of cutting interest rates—a move that had been expected for quite some time. While initial doubts centered on the timing of these cuts, that concern later shifted to the magnitude they might entail. This was settled with the first cut—of 100 basis points—bringing the rate to 10.25%, which was seen as a signal of what was to come in future meetings.
With inflation figures that had come in well below expectations, this fueled a market that was “in desperate need” of rate cuts, which caused significant swings in asset prices. Given that economic activity was not picking up, it was difficult to dispute these projections. However, it always seemed to us that the adjustment was excessive, both in terms of price and interest rate scenarios.
Thus, the 0.4% m/m change in the CPI in July—which was in line with expectations—helped calm the waters regarding such a sudden shift from the macroeconomic trajectory of the past year. In any case, the dichotomous sentiment often displayed by the market—shifting between completely opposite states in a very short time, treating some temporary figures as permanent—is nothing new. I’m not saying we don’t expect inflation to continue easing over the coming months, but the pace did seem excessive to us. The same goes for the MPR: the rate needs to come down in the coming months, but the pace of cuts won’t be as aggressive as the hikes were at the time.
With all of the above in mind, we reviewed the minutes of the meeting in which the rate was unanimously cut by 100 basis points. During the meeting, a reduction of the TPM by either 75 bp or 100 bp was considered, and the latter option was chosen because inflation had fallen more than expected in the latest Monetary Policy Report. However, and quite tellingly, it was made clear that the pace of future cuts was not tied to the magnitude of the first one, thereby somewhat downplaying the urgency to move quickly to a neutral level. This was reaffirmed in interviews and presentations by the president, who stated thatmonetary policy was not rigid and that the evolution of other variables would also be closely evaluated—which we interpret as a nod to the sharp depreciation of the peso and its implications for inflation, especially for goods.
Finally, although there has been significant volatility surrounding our expectations, we are sticking to our outlook for both the TPM and inflation. For the benchmark rate, we expect it to end 2023 at 7.5%, while the CPI is projected to end the year at 4.1%.
