Fynsa
That’s how Britney Spears sang to us in the late ’90s—it was the first of countless hits that catapulted her to the status of “princess” of pop. The chorus repeated that line, innocently blaming herself for doing to her teenage sweetheart the same thing she had done before.
This memory from my teenage years was the first thing that came to mind when I read the statement from the Central Bank’s monetary policy meeting. At that meeting, the Central Bank raised the TPM by 75 basis points, exceeding both our expectations and the Bloomberg consensus (50 basis points), although in line with market expectations implied by financial assets, bringing it to 9.75%.
In the background information provided to support this decision—and in summary—it is noted that the external environment has deteriorated, the armed conflict between Ukraine and Russia remains a major source of risk and instability for commodity prices and, in this context, copper has experienced a significant decline. Domestically, economic activity has been in line with expectations, as the surprise in the latest Imacec was driven by the mining component, while demand components have been slowing at varying rates. Meanwhile, prices are evolving as described in the latest IPoM, barring any specific surprises.
With that in mind, then why has the decision been made to continue raising rates that are already at the upper end of the TPM corridor? As can be inferred from the statement, the main factor in all of this is the sharp depreciation of the currency, and I quote, “(…) these developments will cause a further rise in domestic prices, in a context where inflation and its persistence are already high.” Thus, marginal inflation—even if it stems from a “supply-side” source—would create momentum, which, in the Council’s view, requires an additional rate hike. While we do not fully agree with that assessment, we understand its implications.
In addition, for the fourth consecutive time, an adjustment has been made to the statement’s bias, rrepeating the situation seen at the March and May meetings: a tone that indicated an imminent end to the rate-hiking cycle, only to later reverse that stance and raise rates more than expected. Oops, they did it again. Although I believe it is extremely positive to have a central bank with the flexibility to change its policy strategy in response to sudden shifts in the economic landscape, I also believe that this undermines the impact of future communications on market expectations and the resulting price formation—precisely something the central bank has tried to avoid in the past.
Thus, we believe it is important to revise our monetary policy outlook, since we consider it unlikely that the shift in stance (removing the hint at the end of the tightening cycle) would be justified by a move of less than 100 basis points. Therefore, we forecast that the TPM will reach 11% at the October meeting, ending the year at that level. A new monetary policy corridor is expected to be presented in the September IPoM. Let’s hope they don’t do it again.
