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Bolstering policy credibility a key factor behind the Board’s stance

Andrés Pérez M. & Vittorio Peretti


At the December monetary policy meeting, all Board members agreed that holding the policy rate at 11.25% was the only plausible option. Additionally, the Board signaled that rates would be retained at such a level for as long as required to ensure inflation converges to the 3% target over the two-year horizon. The Board highlighted the negative implications of prematurely beginning an easing cycle. At the time of the policy meeting (December 6), economic developments had been broadly in line with expectations, with economic activity gradually adjusting down from unsustainable levels (Please find our report on the IPoM here).

The Board concurred that the economy was adjusting and that inflation would gradually ease. Nevertheless, the path to re-balancing the economy remained arduous and efforts to reduce inflation should remain strong. The Board noted that the inflection point of monetary policy would be based on the evaluation of the economy rather than specific timelines.

Bolstering policy credibility and avoiding an excessive economic adjustment are key factors behind the Board’s stance. Ensuring inflation converges to the 3% over the two-year horizon would prevent excessive costs for the economy. A premature loosening of monetary policy could increase inflation stickiness, adversely affect economic activity and dent the central bank’s credibility. However, the Board was aware that the disinflation process may unfold more rapidly than expected, and would be vigilant as to the appropriate policy response.

We expect the board will wait for inflation to consolidate its decline towards the 3% target and for the re-anchoring of medium-term inflation expectations (currently at 3.5%) before beginning an easing cycle. We see the policy rate falling to 7% by the end of 2023, with cuts starting mid-year. The next monetary policy decision will be announced on January 26.

Joao Pedro Resende

Andrés Pérez M.

Vittorio Peretti