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Goldman Sachs See Close Call Decision, 100BP Hike Still Warranted

  • Goldman Sachs expect the MPC to hike its policy rate by 100bp to 13.00% on Friday, with likely more than one dissenting vote for less. GS assign a relatively high 45% probability to a milder 50-75bp hike, with 80% of that probability mass skewed towards the 75bp hike.
  • Hence, GS anticipate a very close call between a bolder market-reassuring 100bp hike given the very challenging current and prospective inflation backdrop, and a slightly softer monetary policy response given the already high level of the policy rate.
  • A decisive 100bp hike is warranted given: (1) the expectation of high inflation readings in Jan-Feb (the next MPC meeting is in Mar) due to the cyclical resetting of prices to past inflation (e.g. urban transport services, education), the large 16% minimum wage increase, and high food prices arising from seasonal crop patterns and heavy rains; (2) the significantly higher than expected Dec inflation print, leading to new cyclical highs for headline, core, and services inflation which triggered further deterioration of headline and core inflation expectations through end-2024; (3) a mixed to slightly soft activity data set against a still-positive positive output gap and large current account deficit; and (4) lingering policy uncertainty.

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