Central Bank Preview: One More Step, Then a Pause

Research evidence excerpt

Central Bank Preview: One More Step, Then a Pause

IdeaMsignals of a continued hawkish bias, not a turning point toward pause. This is the

main risk to our call: if the December 2027 expectation continues drifting higher in

the August survey, the historical reaction function would argue for a harder line

than the single 50bp move we expect.

We nonetheless think the fiscal argument dominates this cycle. The Board's own

June minutes explicitly named the fiscal deficit as a driver of demand-side inflation

and called for structural adjustment — responsibility for which now sits with an

administration that campaigned on a more orthodox mix but has yet to lay out its

consolidation plan. We think layering further monetary tightening on top of a

meaningful fiscal consolidation risks an unnecessarily restrictive combined stance,

with limited incremental disinflationary benefit relative to the growth cost. For that

reason, we expect BanRep to deliver a 50bp hike in July and hold thereafter — but

we hold this view with less conviction than we otherwise would, given that the

expectations-based reaction function has not yet turned in our favor.

Strategy implications: Going into the meeting, pricing incorporates ~100bp of hikes

into year-end, followed by a total of ~250bp of easing. Overall, we think that the

recent retracement higher in IBR and TES offers more attractive levels to engage

with bullish rates positions, especially in the 5-10 year parts of both curves. This

would be ahead of the August 7 inauguration and the highly anticipated

presentation of the new government's fiscal plan on August 8, including potential

support from multilateral institutions.

That said, we acknowledge that existing positioning in both TES and IBR skews