Steady as she goes
Despite the headline boost in May’s IMACEC, the underlying momentum remains soft. The y/y figures will likely stay high into June, due to favorable base effects. IMACEC’s consumption-related sectors and retail sales point to softening consumption dynamics. This is echoed in commerce sentiment. With a tame labor market and no significant new minimum wage adjustments on the horizon, wages are likely to lose momentum, potentially weighing down on consumption. Investment forecasts based on large-project surveys remain highly uncertain, while external trade remains broadly stable.
While the CPI headline y/y figure fell in June, this does not mark the start of a disinflationary trend. June’s CPI posted a sharp downside surprise. But the drop in the CPI was driven by atypical transitory declines. Core inflation remained far more stable. We maintain our baseline forecast of 4% inflation at year end. Short- and medium-term inflation forecasts remain highly uncertain.
The June IPOM reinforces our base case, of two 25 bp cuts in H2. Had it not been for the Israel-Iran war, the first cut likely would have been made in June. Despite claiming that its central scenario remains broadly unchanged, the IPOM suggested that there is more room to ease. At the same time, it emphasized that the pace of cuts will be guided by “tactical and communications factors.” Market pricing suggests a July cut would not come as a surprise, making it very likely. Yet risks remain. The IPOM now speaks of a range for the neutral rate (3.5% to 4.5%) rather than a level, suggesting that the Board considers a terminal rate that is above the center of the range.
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