Fynsa
Following the latest Monetary Policy Report and the 100-basis-point hike at the September meeting, we believe that the process of interest rate hikes had entered a “pause” phase.
The communications from headquarters, along with the data analysis, led us to believe that the council would take a few months to better assess the situation, maximize the impact of the actions already taken, and, based on that, take whatever steps were necessary.
However, following this event, the Federal Reserve surprised us with more hawkish language and a statement that reminded us of Volcker, making it clear that the institution would do everything in its power to defeat inflation. Shortly thereafter, it raised its projections for the rate in the short and medium term, putting the eventual normalization to more neutral levels on hold. That move sent shockwaves through the markets, and the local market was no exception. These fluctuations partially altered the assumptions used in the September IPoM, which required a recalibration of our own monetary policy. It didn’t have to be a drastic move, but it did have to be sufficient to continue demonstrating our commitment to the target.
Thus, at the October meeting, the Central Bank decided to raise the rate by another 50 basis points, in line with market expectations and our own, bringing the TPM to 11.25%. In other words, since the rate-hiking cycle began, the rate is 10.75 percentage points higher than the starting point, making it the economy that has made the second-most adjustments to its monetary policy. However, it also stated—now much more explicitly—that “The Council estimates that the TPM has reached the peak of the cycle that began in July 2021 and that it will remain at this level for as long as necessary to ensure that inflation converges to the target (…)”. Although this does not represent a commitment—since conditions may change—it does show that, based on the information available so far, we will not see any further rate hikes. The question now is how long these financial conditions will persist—conditions we estimate to be the most restrictive since the return to democracy.
In this regard, and considering the factors affecting inflation and the lags inherent in monetary policy, we believe the rate will remain unchanged until at least the second quarter of 2023. This is true even when taking into account the economic slowdown, the negative economic data that will take nearly six months to materialize, and an external environment that shows no signs of improvement.
Without price figures showing a significant decline in their month-over-month change—especially in the core component—we do not see room for early normalization.
In any case—and perhaps because of my professional bias—I find it hard to believe that these situations are permanent, as the market often assumes. A little over two years ago, the debate centered on how we would live in a world with negative or zero market rates, with nearly infinite liquidity that didn’t cause inflation and synchronized growth. Today, forums are filled with doubts about how to navigate markets with persistently high inflation, sky-high market rates, and stagnant economies. You might call me a dreamer, but I’m not the only one: economic policies work, and eventually, we’ll return to equilibrium. It doesn’t come for free, though—just like nothing else in life.
