MNI BanRep Preview - Mar 2025: Further Pause Seen, Risk Of Cut

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Executive Summary

• Monday’s monetary policy decision looks like being a very close call, with recent political and fiscal uncertainties appearing to have shifted expectations towards a continued pause in the easing cycle.
• Latest inflation and activity data also support the case for the central bank to maintain its cautious stance and stay on hold at 9.50%.
• The vote is likely to be split, however, with new Board members expected to argue for renewed rate cuts, amid political pressure to support the economy, keeping the door open to the possibility of a cautious 25bp cut.

Recent changes at the Ministry of Finance and associated uncertainty over the fiscal outlook have complicated BanRep’s monetary policy decision on March 31. After unexpectedly pausing its easing cycle in January, amid concerns over inflation risks and rising inflation expectations, analysts had initially been expecting the central bank to resume rate cuts with a cautious 25bp move this month. However, the latest political uncertainty has clouded the picture, especially given the central bank’s pre-existing concerns over fiscal pressures, and a majority of analysts now lean towards the central bank extending that easing cycle pause on Monday.

Speaking last month, BanRep Governor Villar reiterated that large fiscal imbalances are making it difficult to relax the monetary policy stance. The Governor continued to strike a cautious tone, as he noted that inflation has been stickier than regional peers and remains significantly above the 3% target, even as US tariff policy may increase inflation risks. Villar added that a restrictive stance is needed to restore credibility and bring inflation back to target. On growth, Villar also sounded more constructive, saying that high interest rates have hit growth less than expected and that he is starting to see some improving credit indicators. He sees GDP growth coming in at 2.6% this year.