ARGENTINA – Central Bank Survey: Inflation expectations rise again increasing the odds of additional

In our view, these results will likely contribute to a new reference rate hike before year-end

Analysts continued to increase their inflation forecasts for 2017 and for 2018 according to the latest Central Bank survey of expectations, in spite of the recent interest rate increases by the central bank.Participants also now forecast higher monetary policy rates (7-day repo) by the end of this year and the next, although they do not expect further rate hikes. Growth forecasts were left unchanged for both years.

Inflation expectations for 2017 increased to 23.5% from 23.0% in October and 22% in September.Analysts expect consumer prices to jump 2.1% month-over-month in December, due to higher utility prices, after a minor inflation deceleration in November relative to October. The November reading will come out on December 12. For the core reading, the yearend inflation expectation stands at 21%, also much higher than the upper bound of the target set for this year (12% – 17%).

Analysts revised upward their 2018 inflation forecasts for the sixth consecutive month, to 16.6% (from 16.0% in the previous survey). For the next 12-months, the market expects 17.5% (above the 17.3% and 16.9% posted in October and September, respectively). Both readings are significantly above the target range for next year (10%±2%).

Survey participants do not expect changes in the current level of the reference rate (28.75%) until April 2018. The survey showed that participants expect now a reference rate at 22% for 2018, up from 21% in October and 19.5% in September.

In our view, these results will likely contribute to a new reference rate hike before the end of this year. We expect a 100-bp increase in the repo rate to 29.75%, as the central bank aims to reduce inflation expectations in the run-up to the wage negotiation season. The central bank advocates for wage increases around 10% plus an automatic compensation if inflation exceeds that threshold. We see the reference rate at 24% by December 2018 while we forecast an 18% inflation for next year (down from 24% in 2017).

Juan Carlos Barboza
Diego Ciongo

Fuente: ITAU

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