Analysts increased their inflation forecasts for this year in the latest Central Bank survey of expectations. We note that the survey took place before the unexpected announcement of higher inflation targets for 2018 (15% without tolerance range versus 10±2%, previously) and 2019 (10% without tolerance range versus 5±1.5%), suggesting that further increases in inflation expectations are likely to be shown in the next survey to be published in early February. In the survey, analysts still did not expect changes in the reference rate (7-day repo rate) until March, a situation very different from what the market is pricing now.
Inflation expectations for 2018 increased to 17.4% from 16.6% in November. This is the eight consecutive revision since March when participants expected 14% inflation for this year. The reading is still above the new inflation target. Analysts expect consumer prices to climb 1.5% month-over-month in average in 1Q18. However, this information does not incorporate the hikes in transportation fares that were also recently announced. The median of core inflation for 2018 was kept unchanged at 14.9%.
Survey participants did not expect changes in the current level of the reference rate (28.75%) until March 2018. The survey showed that participants expected a higher reference rate than in the previous survey (22.5% versus 22% in the previous month).
Analysts also now expect higher inflation in 2019. The survey showed an increase to 11.6% from 11.3% in the November poll.
In our view, these results illustrate the limits to reduce dramatically the reference rate. In the press conference announcing the target changes last week, Governor Sturzenegger suggested that the new (higher) targets leave room for lower interest rates. In fact, on the very day of the announcement, the central bank started to supply its short-term sterilization bills (Lebac’s) at lower rates. We think the decision to increase inflation targets will likely turn disinflation even harder as inflation expectations will likely continue to increase amid the key wage bargaining season. Consequently, while rate cuts in January seems likely (around 150bps); it will be hard to ease the monetary policy afterwards. In particular, we expect unfavorable inflation data on December and January.
Juan Carlos Barboza