The central bank left the monetary policy rate unchanged at 26.25%. The decision was expected by us and the market. The central bank last increased its policy rate in early April (by 150-bps). The statement announcing the decision shows again the central bank currently sees no room for rate cuts, given the current evolution of inflation. Specifically, the central bank said it is not appropriate to reduce the “anti-inflationary bias” resulting from the April policy rate hike.
The central bank noted that inflation expectations were revised upward for this year and next in its latest survey with market participants. Analysts surveyed now expect 22% inflation for this year 2017 (measured by the national index), 0.4% above the previous survey. For the next 12-months, the market expects 17.1%, while for 2018 expectations reached 15.5%, also above the upper bound of the target range for next year (8%-12%). According to the press release, private and public sector high-frequency inflation indicators suggest headline inflation – to be published next Thursday – likely increased in July (which is mainly due to adjustments in regulated prices) but resumed a downward trend in August.
We expect the central bank to stay on-hold for a few more months, before engaging in a gradual easing cycle. We expect the reference rate at 25% by the end of this year. Rate cuts are unlikely before there is more clarity on the political scenario and, consequently, less pressure on the peso. Furthermore, we note that an adverse outcome in mid-term elections can lead to more exchange rate depreciation, eventually forcing the central bank to increase interest rates.