The central bank noted that the process of disinflation resumed in May.
The central bank kept the monetary policy rate unchanged at 26.25% for the third consecutive time at its second meeting in May. The central bank noted that the April inflation readings (2.6% MoM and 27.5% YoY) were inconsistent with the disinflation path but anticipated by the monetary authority. For this reason the central bank started to tighten monetary policy in March, through market interventions and then hiked the reference rate (7-day repo rate) by 150 bps on April 11.
In its statement following the decision, the central bank noted that, according to estimates and high-frequency indicators, the process of disinflation resumed in May. The central bank will nevertheless seek to manage liquidity conditions in order to ensure the consolidation of this process, and will be ready to act if necessary, as previously stated.
According to private estimates, inflation could fall below 2% MoM in May. We think that while another rate hike cannot be fully discarded, the statement has reduced its likelihood. We believe that a clear trend of declining inflation is sufficient to warrant lower interest rates in the future, even if actual inflation exceeds the 2017 target by year-end. We expect the repo rate to fall to 22% by December.
We note that according to the previous statement, the CPI target for this year will be the cumulative readings at the national level (INDEC recently announced that it will publish a national CPI starting in July) plus the cumulative inflation in the greater metropolitan region of Buenos Aires (current CPI Index) for 2017, for which the national CPI is not available. As INDEC stated that the new CPI – to be published by mid-July – will provide year-to-date data, we think it is likely that the measure of the accomplishment of the inflation target could be done using only the national CPI. The central bank statement did not go back to this issue, and just confirmed its commitment to the 12%-17% target for 2017.