BCB to hike or not to hike?

Today, the BCB will announce its latest rate decision. Here, the Bank finds itself stuck between a rock and a hard place with inflation in the high single digits while GDP growth is set to contract by more than 2.5% y.y.

The Bank has not raised rates since it completed the tightening cycle from 11.00% before the government elections last October to 14.25% in July of this year. That the Bank hadn't raised rates in the lead up to the election but started in the immediate aftermath supports the view that the Bank may face pressure not to hike now as the economy contracts and faces a fiscal deficit. 

"Certainly the Bank is not expected to start cutting rates anytime soon and they themselves have been explicit in stating that rates will remain high for sometime", says Rabo Bank. 

This has helped to anchor inflation expectations with economist's inflation expectations for the period of 2017-19, falling from 5.5% at the beginning of the year to 4.5% by mid-August. That said, recent data have shown signs of inflation expectations edging higher again.