The probability of an aggressive action by the central bank seems low at this point.

Argentina’s central bank cut its benchmark interest rate by 75-bps to 28%, in its first monetary policy meeting of the year. The decision was below our expectation (150 bps) and the market’s (125 bps, according to Bloomberg). Importantly, in the statement announcing the decision, the central bank kept a cautious approach, indicating that interest rate cuts must be contingent on a better evolution of inflation.
The Governor of the Central Bank had already suggested that the recent (and unexpected) increase of inflation targets was consistent with lower interest rates. The central bank’s new targets are 15% for 2018 and 10% for 2019, versus the previous targets of 10±2% and 5% ± 1.5%, respectively. For 2020, the target is 5%.

The December 2017 CPI will be published next Thursday and will likely show a significant increase due to hikes in energy tariffs. While the central bank recognized that some impact on core price evolution is likely, it stated that core inflation in December and early January remained under control according to high-frequency indicators.

In its concluding remarks, the central bank said it will be cautious in adjusting the monetary policy to the new targeted disinflation path. While the central bank reaffirmed that the new targets mean a less contractive monetary policy, interest rate reductions would come only as inflation data confirms the desired disinflation pace. So, rate cuts in the next meetings remain a possibility (perhaps matching the yield paid by Lebac’s), but the probability of an aggressive action by the central bank seems low at this point.

Juan Carlos Barboza
Diego Ciongo