As expected, the Central Bank’s board opted to hold rates at 13.25%, but two of the seven member board were in favor of a 25bp cut. Following the decision, the one-year ex-ante real rate sits at 7.47% (using the monthly analyst survey; +24bps from the previous meeting in July), consolidating the contractionary stance of monetary policy. The overall message from Governor Villar and Finance Minister Bonilla at the press conference differed. The former sitting in the more conservative camp, favoring the accumulation of more information that would confirm a downward inflation trend in order to avoid a policy error (a position held by the majority of the board). Meanwhile, the latter showed a preference to start the cycle, stating that the slower-than-expected inflation fall is in part due to the reduction of the fuel subsidy, while there are clearer signs of an economic slowdown. Looking ahead, the September inflation print and the evolvement of medium-term inflation expectations will be key to see whether there is sufficient support within the board to start the cycle in one month’s time.
High inflation is still a concern, with El Niño as one of the main risks ahead. Inflation surprised to the upside in August with a 0.7% monthly variation, 20bps higher than the analyst consensus and the technical staff expectation. According to the central bank's monthly analyst survey, yearend inflation expectations increased by 48bps to 9.48% (Itau: 9.3%) while the 2024 inflation expectation sits at 5%. Governor Villar positively remarked that core inflation has been falling for two consecutive months, but highlighted that it is still elevated compared to peers that have started cutting rates. While the governor noted that the board expects inflation close to the target by the end of 2024, there are upside risks (stemming from indexation, and a strong El Niño). Bonilla stated that the increase in global oil prices will widen the gap between local and international fuel prices, adding pressure to inflation.
Activity has decelerated in line with central bank expectations. Villar confirmed that the activity moderation is in line with the 2023 central bank growth forecast of 0.9%. Regarding the labor market's resilience, Villar remarked that it could be due to the high economic growth observed in 2022, allowing for ongoing strong job creation.
Regarding the financial sector, the central bank is not considering additional liquidity measures, signaling the liquidity market conditions have improved at the margin.
The split decision to hold rates means that the start of a rate cut cycle cannot be ruled out in October. Activity is showing clear signs of weakening, but significant inflation uncertainty remains. Overall, high real rates and the slowdown in domestic demand point towards the start of a gradual easing cycle ahead, but elevated uncertainty on the speed of the disinflationary process makes the timing unclear. We view the October meeting as a 50-50 call for the beginning of an easing cycle with a 25-bp cut. On Wednesday, the minutes of today’s meeting will be released. The next rate meeting will take place on October 31.