RIO DE JANEIRO, BRAZIL – With “all” board members agreeing to signal to the market that the policy rate will be at its neutral level of 3.5% sooner rather than later, the historic 125 basis point adjustment was made, bringing it to 2.75%.
According to the minutes of the October monetary policy meeting, given the evolution and risks of the economic environment – which assumes more substantial inflationary pressures due to the depreciation of the peso as a result of the discussion of a fourth withdrawal of funds from the AFP and a greater pass-through of the costs caused by the disruption of logistics chains – it was “necessary” for the monetary policy rate (MPR) to approach its neutral level earlier than expected in the September IPoM.
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Thus, the institution’s president, Mario Marcel, vice president Joaquín Vial, and board members Pablo García Silva, Alberto Naudon, and Rosanna Costa considered this the “best option” to keep it “roughly neutral at the next meeting, leaving room for the IPoM in December to calibrate future steps.” This assumes that the revised economic and inflation outlooks for 2022 and 2023 are taken into account.
In this context, the Central Bank considered four scenarios for a hike: 75 basis points (bp), 100 bp, 125 bp, and even 150 bp.
The first was discarded because it ran counter to the effort to warn the market that the policy rate would be at 3.5% before the middle of the year’s first half.
As for the 150 basis point option, although it proved to be “a good alternative if one wanted to surprise the market and try to influence inflation expectations strongly,” it was discarded because it could provoke a “further tightening of local financial conditions” without any projections for it, or because it could have been associated as a reaction to inflation surprises unrelated to core inflation.
The 125 basis points announced two weeks ago was, according to economists in charge of the country’s monetary policy, the perfect combination to surprise market participants and send a message that the policy rate needed to be brought forward.
The market received a message in light of projections that the TPM will already exceed its neutral value in 2022.