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  • BanRep have plainly telegraphed in its July meeting and in recent interviews by several board members that they are ready to start hiking after an extended pause at 1.75%.
  • Earlier this month JPM changed their call for BanRep to begin the cycle with a 50bp hike, up from 25bp.
  • In their view, BanRep should and will hike 50bp on the combination of: a) sharply higher headline inflation above the target ceiling and the related upward drift in expectations; b) a current account deficit that they have revised up to 5.2% of GDP financed increasingly by portfolio flows; c) the related strong recovery in domestic-demand driven activity, which this week led them to revise 2021 growth up to 9%y/y; and d) latent financial stability risks amid large twin deficits and uncertainty over the 2022 election cycle.
  • However, public comments from Governor Villar and some of the dovish-leaning members of the board have suggested that this is a close call, given some directors' preference for a "gradual" tightening cycle, which we would interpret as 25bp per meeting.
  • In JPM's own scenario, starting the cycle with 50bp would represent more of a down-payment that could then allow BanRep to more comfortably ease into a more gradual pace thereafter.