The Council will probably wait for the March macroeconomic projection before making future decisions. In March we will also know the preliminary estimate of CPI inflation for January and we should know the Climate Ministry’s plans to “unfreeze” energy prices for households.
For now, our estimates point to a new drop in inflation in the coming months (up to 2.5% year-on-year) and a rebound in the second half of 2024 (5-6%).
So far, our base case has assumed a symbolic interest rate cut (of 25 basis points) in May. However, the tone of the MPC statement appears hawkish, despite the improving inflation outlook, indicating that the chances of even a small rate cut have declined sharply.
GDP for 2023 indicates that the recovery in consumption stalled in the fourth quarter, suggesting that the period of falling core inflation may be prolonged. We continue to believe that the dynamics of high labor costs and economic recovery will cause core inflation to recover in 2024-25, but favorable internal and external conditions may have indicated that this moment of underlying recovery is moving away. Furthermore, the stabilization of food prices in January causes a drop in the CPI to 2.5% year-on-year in March. Despite these events, the MPC indicates that inflation “could increase significantly”, so We assume that the chances of a rate cut are very low..
Furthermore, the Council highlights that its objective is to achieve a “sustainable” return of inflation to the target, which may suggest that the authorities will not react to the expected temporary drop in inflation in the first quarter of 2024 (not even to the target of the GNP in March).
We think the governor may dampen expectations of rate cuts during Thursday’s press conference.