July 19, 2024

The cycle of increases in the Monetary Policy Rate (MPR) would finally be over. This was unanimously decreed by the Central Bank Council, which at its meeting concluded yesterday, Wednesday, decided to raise it by 50 basis points, to a peak of 11.25%.

“The Board estimates that the MPR has reached the maximum level of the cycle that began in July 2021 and that it will remain at this value for the time necessary to ensure the convergence of inflation to the target within the two-year policy horizon,” reads the statement released after the appointment.

The group led by Rosanna Costa qualifies the risks of the macroeconomic scenario as “high” and warns that “its short- and medium-term implications must be carefully evaluated.” In this table, the Board assures that “it will remain attentive to the development of these events and reaffirms its commitment to conducting monetary policy with flexibility, so that projected inflation is located at 3% in the policy horizon.”

Although the directors recalled that in September inflation moderated slightly, rising 13.7% annually, they also acknowledge that the CPI accumulated in the last two months has been higher than forecast in the last Report, “mainly due to the greater increase of the prices of some foods. In fact, last week Costa updated the bet for inflation at the end of this year to something below 13%.

Yesterday, the Board also admitted that “inflation expectations two years ahead continue to be above 3%”.

The message marks a change in tone from the previous encounter. There, after raising the rate by 100 points in a decision divided into three opinions – up to 10.75% – the group pointed out that the MPR had reached the maximum level considered in the central scenario of the Monetary Policy Report (IPoM).

But, there he limited that the following movements of the rate would depend “on the evolution of the macroeconomic scenario and its implications for the convergence of inflation to the target”, something that finally moved away from the base scenario.

The ruling body’s decision was in line with what the market anticipated. Although some voices were betting on maintaining the rate, the Economic Expectations Survey published by the governing body on Wednesday contemplated the 50 bp increase in the rate that materialized, and agreed that this would indeed be the last of the cycle started on last year.

And the cutouts?

Given how adamant the Central was about ending the MPR hikes, the market is already evaluating when the cuts would begin.

From Santander they comment that in the coming months there would be a “gradual but sustained” decrease in inflation, hand in hand with an economy that continues to contract. This -they say- will give rise to the Council beginning to evaluate a change in its monetary strategy in the December Report, and they point out that the cycle of losses could begin at the meeting at the end of January or, “more likely” , at the beginning of April.

At BCI Estudios they agree that the first cut in the rate would be made from the second quarter of next year, “subject to the anchoring of inflation expectations at 3% over a two-year horizon,” they note.

Who also agrees is Sergio Godoy, chief economist at STF Capital, who estimates that the MPR would remain at its current level at least until the second quarter of 2023, when a cycle of declines would begin, “whose speed would be data-dependent”.

In the Coopeuch Research Department, they highlight the “forward guidance” of the statement: “no more increases in the TPM for the moment, waiting for inflation (and its expectations) to show clear signs of setbacks to begin the normalization of monetary policy , something that we estimate will materialize at the beginning of next year”, they say.

Meanwhile, Claudia Sotz, chief economist at Tanner Investments, points out that “inflationary risk factors, mainly those derived from the international scenario, prevail, and internally, there is the potential depreciation of the currency beyond its fundamentals.”

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