The minutes of the May monetary policy meeting (May 11-12) show consensus within the board that holding rates at 11.25% was the only plausible option. While activity and inflation are unfolding in line with the 1Q23 IPoM scenario, more data is required to confirm that a path of inflation converging to the target has consolidated.
The economic adjustment is progressing along the right path. Consumption dynamics are softening, the labor market is gradually loosening and headline inflation remains high but has fallen. Core inflation remains sticky. Overall, the board agreed that despite further signs of an adjusting economy, the inflationary problem had not been resolved, and more information was needed to evaluate the inflation trend.
The board continues to highlight elevated uncertainty, with the materialization of certain risks leading to scenarios of both higher and lower inflation. External risks continued to be high, due to both the probability of major disruptions in the banking system and an optimistic view of the markets regarding what it would cost to resolve the inflationary process in developed countries. Risks associated with scenarios of higher inflationary pressures were noted to be particularly complex and costly.
We expect the beginning of the easing cycle to occur in July and consider a cautious easing pace that results in a year-end rate of 9.25%. Nevertheless, as inflation remains elevated, persistent core inflation leading up to the July policy meeting could lead to a further delay in rate cuts. The next monetary policy meeting will take place on June 19, with the 2Q23 IPoM to be published on June 20.