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SocGen Suspect That Rate Cuts Are Unlikely To Begin Before Q4 ‘23

  • While high inflation requires BanRep to stay hawkish and raise rates further, SocGen believe there is little likelihood of this after the bank’s dovish rate hike in March. The central bank has repeatedly surprised SG/consensus to the downside with less tightening than expected over the past year and a half.
  • In many ways, the economy, despite the substantial slowdown, is still overheating, with aggregate demand trending above potential and inflation remaining at over four times the central bank’s target. This, together with the fact that core inflation continues to rise, makes the central bank’s decision purely based on year-ahead inflation expectations that have moderated in the past few months (but not substantially). Inflation is likely to fall in the coming quarters and that should take real interest rates to positive territory.
  • However, upside risks remain, given the still-heathy level of demand, and a currency, that despite its recent appreciation, has been one of the worst performers in EM world in the past 12 months.
  • The possibility of additional rate hikes could increase, depending on upcoming Fed decisions and their impact on EM asset prices, including on the COP.
  • Given the dovish nature of the recent hike and uncertainties prevailing over the inflation outlook, SocGen suspect that rate cuts are unlikely to begin before 4Q23. Nevertheless, BanRep could continue to surprise them to the downside, depending on incoming core inflation numbers.

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