Fynsa
Over the past few months, I’ve had several debates at the office regarding the TPM. These have been discussions of ideas, of course, about how the current rate is supposedly wreaking havoc on certain sectors of the economy and, given that, it should already be coming down—or, at the very least, start to do so as early as the next meeting. It falls to me to play the bad guy, because I have to justify why none of that should happen and why the rate should remain at its current level for at least a couple more months. At this point, my popularity with the real world must be in the gutter.
However, our estimate of the MPR has little to do with my feelings toward the business community or debtors and a great deal to do with my interpretation of what the Central Bank’s board is thinking (or not thinking). I always tell clients that all the variables in our macroeconomic scenario are estimated within our models, except for one. The projection of the monetary policy rate has nothing to do with what “we” would do, but rather with what we estimate the Central Bank will do. And that makes a significant difference in how we understand our role as economists at a financial institution—as opposed to academic economists, policymakers, or pundits. Prices are determined by what they are, not by what we think they should be.
Thus, oneone of our primary tasks is to read almost everything published by the central bank on this subject. Most recently, although it might not have seemed that significant, the latest Monetary Policy Meeting held last Friday at 6:00 p.m. (friends in the communications division, really?), provided several clues as to what the monetary policy strategy might look like over the coming months.
Recent data on economic activity and, above all, inflation had been perceived by the market as strong signals that the tightening cycle might be coming to an end. However, even though the figures seem to point in that direction, it is still too early to claim victory and/or to assert that the process of resolving macroeconomic imbalances has been fully confirmed. The June meeting (with the IPoM) is just around the corner, and for that meeting, we will only have additional information from the Q1 2023 National Accounts (May 18), the April Imacec data, and the May CPI. While we expect these trends to continue to solidify, this would still not be sufficient for the Council, which reiterated the language set forth in the current IPoM, suggesting the possibility of policy rate cuts starting next September. It is true that the monetary policy corridor allows for earlier rate cuts, but this would require the data observed so far to have been much more indicative of a decline in inflationary pressures than they have been to date.
Therefore, whether we like it or not, the Central Bank will remain steadfast in its goal of bringing inflation down to its 3% target within two years, and until that happens, it will not begin to lower the interest rate. This does not deny that this decision is detrimental to various sectors of the economy, but these drawbacks do not outweigh the negative consequences of failing to control prices in a timely manner and the long-term effects this would have on household well-being. So, as Guns N’ Roses used to say, a little patience.
