Fynsa
After the last Monetary Policy Report and the 100 bp hike at the September meeting, we thought that the process of interest rate the process of interest rate hikes had entered a "pause" mode.
The communications elements of the Central, together with the analysis of the data, led us to believe that the Board would take a few months to better assess the situation, to be able to magnify the impacts of the actions already taken and, accordingly, to make the necessary moves.The board would take a few months to better assess the situation, to magnify the impact of the actions already taken and, accordingly, to make the necessary moves.
However, after this instance, the Federal Federal Reserve surprised with more aggressive language and a speech that reminded us of Volcker's mandate. VolckerThe Fed made it clear that it was going to do everything in its power to defeat inflation. After cardboard, he raised his projections for the rate in the short and medium term, leaving the eventual normalization to more neutral levels on hold.. This move had an impact on the markets, and the local market was no exception. These fluctuations partially modified the assumptions used in the September IPoMwhich required a recalibration of our own monetary policy. It did not have to be an exaggerated movement, but enough to continue to show commitment to the target.
Thus, at the October meeting, the Central Bank decided to raise the rate by another 50 bps, in line with market expectations and our own, to leave the MPR at 11.25%.. This is 10.75 bps higher than the starting point since the beginning of the hike process, becoming the second economy that has made the most adjustments to its monetary policy.. However, it also stated, now much more explicitly, that. "The Board estimates that the TPM has reached the maximum level of the cycle initiated in July 2021 and that it will remain at this value for the time necessary to ensure the convergence of inflation to the target (...)". Although this does not represent a commitment, since conditions may change, it does show that, with the information available so far, we will not see more hikes and the question, now, is how long we will have these financial conditions, which we estimate are the most restrictive since the return to democracy.
In this regard, and considering the factors that are affecting inflation and the lags with which monetary policy operates, we believe that the rate will not move until at least the second quarter of 2023, we believe that the rate will not move until at least the second quarter of 2023.. This even taking into account the economic slowdown, the negative activity data that will take almost 6 months and an external scenario that would not lift its head.
Without price figures that begin to fall significantly in their monthly variation, especially in the underlying component, we see no room for early normalizations.
In any case, and perhaps due to professional deformation, I find it hard to believe that these situations are forever, as part of the market often internalizes. A little more than two years ago, the debate centered on how we were going to live in a world with negative or zero market rates, with almost infinite liquidity that did not cause inflation and synchronized growth. Today, the forums are filled with questions of how to navigate markets with permanently high inflation, sky-high market rates and stagnant economies. You may say I am a dreamer, but I am not the only one: economic policies work and eventually we will return to equilibrium. It's not free, of course, like nothing else in life.
