Banrep’s technical staff revised inflation up, and outlines an interest rate path that, on average, is above analysts’ expectations. In the first quarterly Monetary Policy Report of the year, Banrep’s staff maintained its 2023 and 2024 GDP growth forecast at 1.0% (Itaú: 1.0%; 7.3% in 2022) and at 0.8% (Itaú: 1.2%). The staff’s 2024 year-end inflation forecast was revised up by 1.9pp to 5.9% (Itaú: 4.8%; 9.3% last year), well above the 3% target, while a 2.8% inflation rate is projected by the end of 2025 (Itaú: 3.0%). Regarding monetary policy, the central bank staff’s baseline scenario implies a policy rate path that, on average, is somewhat above the analysts’ expectations (12.7% during 1Q24 and 9.2% in 4Q24). The technical staff also maintained their neutral real rate estimate at 2.4% for this year (5.4% nominal).
Inflation pressures remain elevated. The 1.9pp upside inflation revision for this year to 5.9% came on the back of sticky services inflation, the minimum wage increase, and regulated price pressures (mainly electricity prices). Core inflation is expected to fall to 5.4% by this yearend (+1.2pp from November’s outlook). Although the previous report already incorporated an El Niño effect for 1H24, this update expects a stronger impact on food and energy prices.
BanRep’s staff projects a faster narrowing of the current account deficit (CAD). The technical staff expects the CAD to have narrowed to 2.8% of GDP in 2023 (60bps below November’s call; 6.2% in 2022). For this year, the CAD was revised down to 2.9% (-30bps from the previous report). A lower than expected CAD is due to continued softening of the domestic demand.
The inflation concern outlined in the report challenges our call and market pricing on an acceleration in the pace of rate cuts. We expect a yearend rate of 8% (in line with the analyst survey results). The minutes of the January meeting will be released on Monday February 5. The next monetary policy meeting will take place on March 29.
