Falling inflation on the back of FX strength?
In February, CPI inflation continued declining, to 7.6%y/y, while Industrial production´s 12-month accumulated growth rate fell to 3.0% y/y. As might have been expected, the BCU decided at its most recent COPOM meeting not to raise the reference interest rate any further, keeping it at the historical high of 11.5%.
The question that we are trying to answer is whether the BCU will be tempted to keep the 11.5% nominal annual reference rate (close to a 12.2% effective annual rate) while the economy has an inflation rate below 8% y/y and is showing signs of cooling growth. Or if, more likely sooner rather than later, it will start cutting the rate even if this might imply triggering some peso weakness. Will the BCU risk a hard landing of the economy or relax its monetary stance, risking some inflation?
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