MNI BanRep Preview - Jan 2021: Another Split Decision Hold, Await Further Information

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MNI BANREP PrevJan2021.pdf

• State-of-play - At the previous meeting the committee were split 5-2 in favour of an unchanged decision to keep rates on hold at 1.75%.
• The 5-member majority emphasised the need to focus on medium term inflation expectations, which remain near the 3.0% target, adding that indicators of economic activity continue to point to a swift recovery.
• The two dissenters believed the recent decline in inflation might suggest an impending downwards shift to inflation expectations, warranting immediate addition stimulus to close the inflation and output gaps.

• New Governor – Leonardo Villar served as deputy governor between 1997 and 2009. Most recently he has been the nation's top representative at the International Monetary Fund in Washington. Some analysts have noted the change could imply a marginally less dovish bias, but no significant change in the monetary policy outlook is expected.
• Developments – Inflation in December came out well above expectations at 0.38% mom (vs 0.19% consensus). While inflation surprised the market, this did not translate into higher expectations for 2021, revised slightly lower to 2.69% from 2.74%. For 2022, however, analysts expect consumer prices to rise 3.08%, relatively unchanged from 3.05% a month ago. The fact that analysts expect inflation to rise towards its target over the monetary policy horizon continues the favourable argument of transient behaviour.