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SocGen See Heightened Risk Of 75bp July Hike And/Or Tightening Extension

  • Inflation has risen further to 11.5% in May (from 10.5% in April) while the current consensus expects it to have reached 12.7% in June. The year-ahead inflation expectations have risen to 6.5% while the 23-month expectations have declined one tick to 3.6%, still well above the BCCh’s target of 3.0%.
  • The near-term inflation projections now face two opposing factors – sharply depreciating currency (-15% since end of May) and a substantial decline in commodity prices (-15.6% since end-May). As the fear of a slowdown in major economies spreads amid tightening financial conditions, these trends could persist in the coming months. As a result, the path of inflation moderation remains highly uncertain even though SG expect it to begin to decline in 3Q22 due to substantial base effects and an improving supply outlook.
  • The economy is contracting sequentially (with negative monthly activity growth in five out of last six readings) but continues to be buoyed a high level of demand, led by stronger-than-expected consumption. The downward adjustment in demand, currently led by weaker investment, is likely to intensify in the coming months. This should cool the labour market further and help bring down core inflation (9.0% yoy in May) over the policy horizon. Nevertheless, with demand remaining strong vs GDP potential, there is no immediate pressure on the central bank to consider policy support.
  • In its June statement, the central bank talked about slowing the pace of tightening going forward and we therefore expect it to raise the policy rate by 50bp to 9.50% in July.
  • Nevertheless, given the changed currency context and the continued rise in inflation, SocGen now see a substantial upside risk that the July rate hike won’t be the last in this tightening cycle. In fact, they see a meaningful possibility of another 75bp hike in July.

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