Fynsa
We knew it was going to be high, but even so we came up short. January's CPI change came in above expectations and was up 1.1% from the previous month, causing year-over-year inflation to steepen to 4.9% from 4.5% in December. This only fueled the fears of a market that has again become convinced of higher and permanent inflation.
There are many reasons for the above, especially for the various analyses on cost increases, the second round effects of the increase in electricity rates, the exchange rate depreciation, Trump's tariffs... however, it is difficult for me to take all that to support increases in inflationary expectations in 5, 10 and more years. For that to happen, one would necessarily have to assume that one of the few economic institutions that continues to function properly would cease to do so: The Central Bank.
The issuer's goal is to maintain inflation at around 3% over a two-year horizon. It is difficult to evaluate its fulfillment, given that it has a future target, but the truth is that this was never the case. The important thing is that the target allows us to align agents' expectations with respect to what the Council is going to decide today in order to -in that way- reach that 3%. Because, let's be clear, there are things over which we have control and others over which we do not.
In this sense, it seems to me that the Central Bank has taken up the gauntlet of this greater concern and has made it clear in its communication. Both in the communiqué of the January meeting and in the recently published minutes of that meeting, it is clear that the inflationary risks previously described require a much more conservative monetary policy action, at least in the short term.
The above has been read by us as a TPM that would remain at 5% for a longer period than we had previously expected. But not only that. The move to what could be called a neutral bias - in addition - leaves open the door that, if necessary, corrective actions (such as raising the rate) could be taken so that the inflation target is met. While we do not consider this as part of the baseline scenario, it seems reasonable in light of rising longer-term inflation expectations.
Now, in this sense, asset prices effectively incorporate higher inflation on a permanent basis, but at the same time, aPMR above the current level, also on a permanent basis. This is not consistent.
If we think that the issuer is credible, then we can assume a higher rate, but necessarily an inflation that would be controlled in the medium term. If we believe the opposite, inflation would remain high, but with a rate that would not have gone up - or even down - because the board "would not do everything necessary" to achieve its objective. So we have to agree.
Despite the risk assessment, we believe that, during the second part of the year, most of the transitory elements that are affecting inflation will dissipate, which would allow the central bank to make a couple of rate cuts to reach neutrality. Let's not forget that domestic demand remains weak, the labor market is stagnant and there are external risks to global activity that can be executed at any time.
