There are reasons not only for the Central Bank to resume the cycle of rate cuts, but also for it to, without losing prudence, get ahead of the Federal Reserve.
Bets that the central bank will resume cutting interest rates in the coming weeks after a long pause have increased as markets are pricing in the Federal Reserve to begin lowering rates next month.
What is not so clear is whether the Central Bank will make the decision to lower domestic rates before or after the Federal Reserve does.
And the chances of him doing so soon, giving a lesson in courage without losing his prudence and strategic mastery, have increased.
The Central Bank had already given this type of lesson before.
It is enough to remember that the Central Bank decided on May 31, 2023, to change its monetary policy cycle from restrictive to expansionary, by reducing its monetary policy rate from 8.50% to 8.00%, and it did so before large banks such as the Federal Reserve and the European Central Bank did so.
It was the first of four cuts that brought its policy rate to 7% by November 30, 2023.
Since then, the Central Bank has maintained a pause in reducing rates despite the fact that the inflation rate has remained below the annual inflation target for eight consecutive months (3.57% as of December 2023, 3.30% as of January 2024, 3.30% as of February, 3.38% as of March, 3.03% as of April, 3.20% as of May, 3.46% as of June and 3.54% as of July).
We have stated in writing that the reason why the Central Bank has not resumed the process of reducing interest rates is because it has wanted to avoid a widening of the gap between its monetary policy rate and that of the Federal Reserve, in order not to discourage the entry of foreign investment into the country.
But there are growing signs that the Federal Reserve will begin cutting rates as early as next month, creating room for the central bank to do the same.
The first sign is the enormous pressure placed on the Federal Reserve by the ECB’s decision to order its first rate cut last June, taking the lead in the rate-cutting process, a role that used to be reserved for the Fed.
But as if that were not enough, there was turbulence on the world stock markets on Monday, August 5, due to increasing fears of a recession in the United States.
And there’s more. It has just been reported that Warren Buffettwho is believed to be the most respected investor in history, has implemented a historic move that has set off alarm bells in the markets: he is building a mountain of liquidity, perhaps motivated by the idea that in periods of crisis, he who has liquidity reigns.
“This movement is probably the response or protection to what is to come for the economy and the markets.”, publishes the Economist, from Spain.
For example, Warren Buffett has sold around 14 million Bank of America shares in recent days for a total of $550.6 millionA move believed to be a response to the expected drop in interest rates that the US Federal Reserve will implement and which will reduce the financial sector’s margin on intermediation and the income they receive from their excess reserves.
So there are reasons not only for the Central Bank to resume the cycle of rate cuts, but also for it to, without losing its prudence, get ahead of the Federal Reserve.
