The central bank argued, once again, that the recent spike in inflation is temporary.

The central bank kept the benchmark interest rate (7-day repo rate) unchanged at 27.25% at its first monetary policy meeting in March. The decision was in line with the market consensus (according to the Bloomberg survey) and against our call of a 50 bps hike. Similar to the statement released with the previous decision, the central bank indicated that it is ready to act if consumer prices do not follow the desired disinflationary path, once the transitory impacts affecting prices subside (thereby suggesting that rate hikes remain on the table).
In the press release accompanying the decision, the central bank noted that inflation expectations for the current year increased to 20.3%, from 19.9%, while the core reading reached 18.1%, up from 17.1%. At the same time, however, it expressed confidence that core inflation in April – while remaining high according to high frequency indicators – will be lower than in March. The CPI for March will be published on Thursday 12.

The central bank argued, once again, that the recent spike in inflation is temporary (due to the increase in regulated prices and weakening of the peso between December and February) and repeated that inflation will likely decelerate in the coming months on a tighter monetary policy than 2017, wage increases in line with the inflation target for the year (15%), the deceleration of regulated price adjustments in April and central bank interventions in the exchange market. The monetary authority reiterated that its recent interventions were based on its understanding that the peso’s depreciation was not justified by real shocks or the planned path for monetary policy rates. As such, interventions are complementary and not substitute for monetary policy, but are oriented to prevent any disruption of the disinflationary process.

The central bank considers its current monetary stance adequate for its base scenario, but is ready to act if inflation does not follow the desired disinflationary path. As such, the central bank seems willing to continue to “wait and see” until the impacts of the latest hike on regulated price fade. We continue to see significant risks of interest rate increases in coming meetings, particularly if the evolution of core item prices in April disappoints and reserves continue to fall due to efforts to promote the stability of the peso.