Navigating the shock, waiting for momentum
GDP decelerated sharply in H2 2025, and this weakness extended into early 2026. Growth would need to gain significant momentum in the coming months to reach an average of 2% for 2026. In addition to weak data for the first months of the year, the economy is facing a negative income shock from higher international fuel prices.
February retail sales offered a somewhat more constructive signal. But this improvement could be transitory. On the contrary, industry IMACEC recorded one of its largest y/y declines in several years, although according to the Central Bank this can be explained by a transitory slump in fish processing.
The latest Quarterly Bank Lending Survey pointed to weak commercial credit demand, both from large firms and from SMEs. By contrast, the survey showed some improvement in both supply and demand for new credit in construction and real estate. Business confidence deteriorated moderately in March, amid the conflict in the Middle East and a fading of the impulse arising from the change in government.
Labor market data remains soft but stable. The national unemployment rate was unchanged from the previous figures. However, job creation weakened at the margin. The composition of employment also deteriorated. Wage data was somewhat more favorable. Still, the wage picture remains uneven. We were already cautious about the consumption outlook, given weak wage-bill dynamics. The additional hit from higher fuel prices reinforces the prospect of a weak consumption outlook.
The March CPI surprised to the upside. Fuel prices became a key driver after the change in the parameters of the MEPCO, which allowed faster transmission to consumer prices. The international price shock halted the downward trend in CPI inflation observed in previous months. The fuel shock should be even more visible in April.
In our reading of the latest IPOM, the minutes and recent statements by Board members suggest that the BCCH is trying to navigate the fuel price shock without overreacting. The BCCH’s recent communication has been somewhat uneven. The IPOM raised the center of the TPM corridor and the minutes leaned hawkish. However, subsequent statements softened the message. The tone is closer to “wait and see” than to “ready to act.” The tolerance threshold depends on those second-round effects.
Inflation expectations remain the key variable to monitor, for now. The BCCH is also looking at the other side of the shock. A prolonged conflict could weaken global and local activity. Moreover, uncertainty is unusually high. The risk is not only that the conflict lasts longer, but also that it leaves lasting effects. If inflation temporarily stands near 4%, and one- and two-year expectations remain reasonably anchored, we see limited scope for the BCCH to raise the TPM.
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