The central bank’s board held the policy rate at 11.25%, as expected, but two members voted for a 50bp cut. The board highlighted that activity and inflation have unfolded in line with the 1Q23 IPoM scenario, and if the trend persists, a rate cut cycle in the near term will begin. While the decision to maintain the policy rate at 11.25% and to signal the start of an easing cycle soon was in line with our call and consensus, the votes from Board members Garcia and Griffith-Jones to begin the easing cycle today with a 50bps cut came as a surprise (especially considering that activity and inflation have evolved as expected by the central bank). The magnitude and timing of rate cuts will be determined by the economic scenario and its implications on the inflation trajectory. The publication of the rate corridor in the 2Q IPoM (June 20) will provide greater insight on the rate path throughout the policy horizon. With the decision, the one-year ex ante real policy rate (using the analyst survey expectation) is roughly at 7.25%, significantly above the central bank’s neutral real rate estimate of 0.75%, while inflation excluding volatile items still run far above the central bank’s 3% target.
The board highlighted that the monetary policy rate has remained contractionary for several quarters, significantly contributing to the drop in inflation, and although risks persist, they are now more balanced.
The consumption of durable goods has been somewhat weaker than expected, while investment remains stagnant. Indicators linked to consumption have continued to adjust downward, particularly of durables, but leading indicators (imports) suggest the fall will moderate in 2Q23. Investment remains weak, while the labor market is showing less dynamism. In this context, household and business sentiment remains pessimistic.
Inflation expectations are anchored. The 120bp decline in headline inflation to 8.7% in May was in line with expectations, while the core component is adjusting, as expected, more gradually (down 40bps to 9.9%). The board highlighted the re-anchoring (to 3%) of inflation expectations for the key two-year inflation horizon.
In all, the decision suggests the easing cycle will likely begin in July, with a 50bp cut (faster than we had been expecting and what would be consistent with the path outlined in the 1Q IPoM). Our yearend forecast for the policy rate (9.25%) now seems like the ceiling. The improvement in current account dynamics in 1Q23, convergence of inflation expectations to the target (both analysts and traders) and softer domestic demand have laid the groundwork for the start of a gradual easing cycle during 3Q23. Better inflation readings are the missing piece to trigger more decisive monetary easing (that is, cuts larger than 50-bps). The minutes of the meeting will be published on July 06, with the July policy meeting scheduled for July 28.