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Santander on BCCh: Complex Dilemma Points Toward 50BP Hike


Published on July 8:

  • The Council faces a complex dilemma for its future monetary policy decisions. On the one hand, high inflation and the impact of currency depreciation on prices could make it worthwhile to continue raising the rate.
  • On the other hand, the weakness that the economy is already beginning to show – added to more negative perspectives due to the deterioration of the external scenario and the fall in the price of copper – suggest that a much greater tightening of monetary policy will not be required to achieve moderation of domestic demand needed to contain prices.
  • Thus, Santander anticipate that the Central Bank will opt for a 50 bp hike in the MPR during its July meeting and thus place it at 9.5%. Then, at the September meeting, there could be an additional hike of an additional 25 or 50 bps, depending on the next inflation and activity data. From that moment on, monetary policy should enter a pause to start calibrating the right moment to change the trend.
  • Santander estimate that the Central Bank will not seek to offset exchange rate movements with adjustments in the policy rate, unless these imply very substantive changes in its vision of medium-term inflation. In this sense, movements in the currency explained by the fall in the price of copper –although they have a possibly inflationary effect in the short term– tend to be deflationary in the medium term, since the lower terms of trade negatively affect activity.
  • They also rule out the possibility of a foreign exchange intervention, since they estimate that the recent movements of the peso –beyond certain punctual intraday volatility– are explained, to a large extent, by changes in the fundamental variables. Domestic political risk has affected the value of the currency for several months and will probably continue to affect it going forward as long as political uncertainty remains. However, an intervention by the Central Bank can do little about this.

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