In a 5-2 split decision, BanRep continued the easing cycle with a 25bp rate cut to 12.75%. The rate cut was smaller than both the Bloomberg median estimate and our call of a 50 bp cut, also the preference of the Board minority in this decision. The overall message from Governor Villar and Finance Minister Bonilla at the press conference was that the downward inflation trend continued and rates are likely to keep falling. Governor Villar signaled that, with the help of the monetary policy stance, inflation should fall to the 3% target during the first semester of 2025. Finance minister Bonilla favored a larger 50-bp cut and expects a yearend rate of around 8% (implying an acceleration in the size of rate cuts). Following the decision, the one-year ex-ante real rate stands at 7.58%, well above the 2.4% real neutral rate. Governor Villar noted that continuing with the smaller rate cut pace at this meeting would help consolidate the convergence of inflation to the target and eventually allow for larger rate cuts.
Inflation dynamics will be key to the easing cycle. Future interest rate cuts will be cautious, avoiding a situation in which the easing cycle would have to be slowed or even reversed if inflation were to accelerate again. The uncertainty over the impacts of El Niño and the minimum wage hike favored the cautious approach in January and will be key to determine future decisions.
The technical staff retained the 1% GDP forecast for 2023 and 0.8% for 2024. The current account deficit is estimated to have narrowed from 6.2% in 2022 to 2.8% in 2023 and then widening to 2.9% in 2024. Villar highlighted that external conditions have improved, with the global economy slowing by less than expected. Finance minister Bonilla indicated that the updated fiscal plan would be released after the GDP report in mid-February, yet highlighted that last year’s fiscal deficit target was met (4.2% of GDP, versus 4.3% target)
The disinflation process will likely continue, and an acceleration of the rate cut pace cannot be ruled out. For 1Q24 we still see elevated inflationary pressures stemming from weather-related events (food and electricity prices) and indexation. Nevertheless, base effects will likely lead to a notable decline in annual inflation. Beyond 1Q24, weak domestic demand and favorable FX dynamics will probably consolidate the downward inflation trend. We expect rates to reach 8.0% by the end of 2024 (5% neutral), with inflation at 4.8% (3% target). The monetary policy report will be published on Friday and the minutes of the January meeting on Monday.
