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JPMorgan: New Information Changes Relative Odds In Favour Of 100BP Hike

  • Last Friday, following the June inflation print, JPM discussed monetary policy going into Wednesday’s policy meeting, and noted two most likely options: a 75bp and a 100bp hike.
  • Back then, without clarity on the FX intervention decision, they saw a higher probability for the 75bp option, while tweaked the call for the terminal rate to 10.5% (call that also hinges on J.P.Morgan baseline for strong global deceleration yet no recession).
  • Monday provided two additional pieces of information that, in JPM’s view, changes the relative odds in favour of a 100bp hike.
  • First, additional fiscal accommodation for 0.4% of GDP. Second, markets well functioning in terms of exchange rate plunge, and thus CBC staying on the sideline when it comes to FX intervention. But the Board also noted the heightened sensitivity of the currency to external shocks, coming from the current account deficit, high inflation and heightened domestic uncertainty. While the CBC has no ability to tackle the latter factor, it does have a say in regard to the first two factors.
  • The institutional breakdown of the current account balance showed a strong deterioration of households saving-investment deficit in 1Q22. Moreover, the FX pass-through is higher in scenarios of elevated domestic uncertainty. Thus, the information revealed suggests a higher probability of a 100bp hike, leaving the door open for additional tightening so for inflation expectations to converge to target by the policy horizon.

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