Scotiabank on BanRep: Potential For Higher Rates Earlier Than Expected

Scotiabank on BanRep Decision: Inflation Risks Will Lead To Higher Rates Earlier Than Expected

The main changes since the January meeting are concentrated on inflation risks. In this regard, February inflation surpassed 8% y/y, while Russia’s war on Ukraine poses new upside risks to global inflation and generates new uncertainty with respect to economic growth. Coming out of Thursday’s meeting, it will be important to see the Board’s assessment regarding current risks and if there is a split vote.

• Since January’s meeting, incoming information showed robust economic activity. However, soft indicators such as confidence indicators are pointing to a moderation in business and consumer sentiment. In the same vein, employment gains remain limited and that fact could once again result in a dovish split vote.
• With inflation surpassing 8%, and inflation expectations moving up, the Board is likely to consider moving to higher rates sooner than expected. International conditions point to tighter financial conditions down the road and given the hawkish Fed, and the accelerated pace of tightening elsewhere in the Latam region, BanRep will be encouraged to follow.
• All in all, while a 150 bps hike is Scotiabank’s base case scenario, a split decision including a vote(s) for a smaller hike should not be wholly discounted given the uncertainty with respect to economic activity.
• In coming months, inflation developments will determine the terminal rate; for now, Scotia expect the current tightening cycle to end at 7.50%, with the policy rate remaining at this level for six months. However, if inflation increases more than anticipated the rate would go higher but for a shorter period.