Central Bank Review - Analyst Views

Analyst Views Following BanRep Decision

• Goldman Sachs: A more restrictive monetary stance (above-neutral policy rate) is warranted given the strong growth dynamics, above-target inflation, drifting inflation expectations, and a large external deficit whose funding could become more challenging as global financial conditions tighten and central bank’s in core economies turn more hawkish.
• In addition, in their assessment, high risk-premia and a weaker exchange rate given a challenging fiscal picture and an uncertain policy environment also justify a careful calibration of the central bank’s monetary stance.
  • All in all, GS expect the MPC to raise the policy rate further up in 2022 and expect monetary policy to remain restrictive over the relevant policy horizon.
• JPMorgan: Their own call for now remains that BanRep will move an additional 100bp at the July meeting and then pause at 8.5%. August is a non-voting month, and thereafter there should be more clarity on the path ahead for growth and inflation expectations, as well as the market’s comfort (and relatedly credit premium) with the new government’s agenda as well as the global backdrop.
• If JPM are correct with their prediction of inflation settling just under 5% in the second half of 2023, and BanRep ends up using a level around 5% to deflate the policy rate, then their call for another 100bp hike in July to 8.5% would leave the real policy rate around 3.5%.
• Both staff and the board may well feel this is sufficiently deep into restrictive territory, in JPM’s view (though the market may need some convincing). In the board’s view, reaching 8.5% and then pausing may allow them to have their work done—depending on the data and the evolution of inflation and inflation expectations of course—by the time the Petro administration comes into office.
  • Thus, for now, JPM still stick with this call for a final 100bp hike in July, though we will be attentive to the minutes and informal communication by the board in the coming weeks to fine-tune this call.
• Scotiabank: The first unanimous vote in the current cycle, the decision shows that the doves on the Board now agree on the strength of the economy and that controlling inflation is the priority. It also signals that the end of the hiking cycle is less clear now. In fact, in the press conference, Governor Villar said that is better not to anticipate the end of the cycle, but instead continue with a data-dependent approach.
• It will be key to follow consumer credit expansion to assess in future BanRep moves, while inflation risk remains a key variable to expect higher rates for longer.
  • Scotiabank will revise their expectation of the terminal rate, which is currently calculated at 8.50%. Ahead of the July meeting it will be relevant to follow the update in projections from the central bank staff to anticipate a potential end of the hiking cycle.