You are Lucía Benavente-Orozco, three weeks into your term as Governor of the Banco Central de Costaria. The economy is running hot, inflation has just touched the top of its target band, and by 14:00 today your new Monetary Policy Committee must announce what it does with the 3.50% policy rate, and in what words.
The situation
It is mid-February of Year 3 of the expansion. GDP is growing at 4.2% a year against a trend near 2.5%, and your staff put the output gap at +1.2%. Unemployment has fallen to 4.8%, below the 5.5% they treat as structural. Wages are rising 4.5% a year and bank credit 9.0%, and both are accelerating. Headline inflation is 3.1%, a tenth above the 1–3% band; core inflation, without food and fuel, is 3.0%.
The rate itself can be read two ways. At 3.50% it sits half a point above the staff's 3.00% estimate of the neutral rate, the level that neither pushes the economy forward nor holds it back. But with inflation at 3.1%, it stands only 0.4 points above prices. Rodrigo Salcedo-Ibarra, your chief economist, reminds you that the neutral estimate carries a wide margin of error, and that a decision taken today will reach prices only months from now.
Outside the building, a columnist in the largest business daily writes that the bank is already late and wants a full point. The employers' federation warns that dearer credit will stall an investment cycle that has barely begun; the unions point out that real wages have only just started to grow again. Four of the seven members, you included, were seated this month: inside the bank they call you the junior committee. Markets will price your decision tomorrow morning, and a credibility index that started at 100 will move with their verdict. This is the first of the four meetings in your tenure.