ARGENTINA – Positive surprise in inflation, but not enough to ease monetary policy

The central bank left the monetary policy rate unchanged at 26.25% for the tenth consecutive time.

National inflation decelerated more than expected in August. Consumer prices gained 1.4% between July and August, below Bloomberg’s survey (1.5%) and down from 1.7% in the previous month. Prices have increased by 15.4% year-to-date, while last-three-month cumulative inflation fell to 19.6% (annualized) from 18.7%. In the greater metropolitan region of Buenos Aires, prices rose by 1.5% MoM in August (from 1.8% in July), bringing annual inflation to 23.1% (from 21.5% in July), mostly due to base effects. We note that thecourt ordered a reduction in gas prices in August 2016.

Core inflation was in line with the headline reading, both at the national level and in Buenos Aires.National core inflation reached 1.4%, slightly below the 1.5% reading for the greater metropolitan region of Buenos Aires. As a result, three-month cumulative inflation reached 19.7% (annualized) at the national level and 21.1% in Buenos Aires, from 20.9% and 21.6%, respectively.

The adjustments in regulated prices scheduled for November and December continue to pose a challenge for inflation ahead. We see inflation at 22% by the end of this year (1.4% MoM average for the rest of the year), significantly surpassing the 17% upper bound of this year’s target range.

In this context, the central bank left the monetary policy rate unchanged at 26.25% for the tenth consecutive time. The decision was expected by both us and the market. The press release announcing the decision noted that the central bank was opting to maintain a “contractive bias”, given that inflation expectations for December 2017 remain at 22% and expectations for 2018 have increased to 15.7% from 15.5% in the previous survey. The monetary authority highlighted once again that that the easing cycle in 2H16 led to higher inflation readings that forced the central bank to reverse its monetary-policy stance in order to contain inflation. We think that even if there is a reduction of inflation expectations in the coming months, the central bank will likely stay put for a while, to minimize the risk of easing policy prematurely (again).

The central bank is targeting a sharp disinflation in the core reading. According to the high-frequency indicators tracked by the central bank, disinflation is on track to consolidation but core inflation remains at uncomfortable levels. The “anti-inflationary bias” (meaning a tight monetary policy) will be maintained to achieve the inflation target for 2018 (10% ± 2%). In addition, the monetary authority will continue draining liquidity through interventions in the secondary market for short-term sterilization bills (Lebacs). Our forecast for the policy rate at the end of this year stands at 25%, and we do not expect changes until the beginning of November.


Juan Carlos Barboza
Diego Ciongo

Fuente: ITAU

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