The central bank said it is ready to act if consumer prices do not follow the desired disinflation path
The central bank kept the benchmark interest rate (7-day repo rate) unchanged, once again at 27.25%, at its second monetary policy meeting in March. The decision was in line with our call and the rest of the market (according to the Bloomberg survey). While in the statement of the previous decision, the central bank indicated the evolution of inflation left no room for monetary policy loosening, the central bank now warns it could act to ensure an appropriate disinflation path (suggesting rate hikes are on the table).
In the press release accompanying the decision, the central bank noted that core inflation in March will remain at a high level according to high frequency indicators (following a 2.1% month-over-month in February). However, the central bank still considered the recent spike in inflation as temporary (due to the increase in regulated prices and weakening of the peso between December and February) and said that inflation will likely decelerate in the coming months because monetary policy is tighter than in 2017, wage increases are in line with the inflation target for the year (15%), and the adjustment of regulated prices will decelerate after April.
The monetary authority clarified that the interventions are complementary and not substitute of the monetary policy. In addition, the central bank mentioned once again that its recent interventions in the exchange rate market are because further weakening of the peso would not be justified by real shocks or the planned path for monetary policy rate.
While the central bank considers the current monetary stance as adequate, it said it is ready to act if consumer prices do not follow the desired disinflation path, once the transitory impacts affecting prices conclude. So, the central bank seems willing to wait to see how inflation behaves after the regulated price hikes scheduled for April. In this context, we expect the central bank to stay put in April, but there are significant risks of interest rate increases. Besides the evolution of consumer prices, the central bank will likely monitor the pressure for exchange rate depreciation, so if reserves were too fall excessively to promote peso stability, monetary policy tightening is more likely.
Juan Carlos Barboza