The September central bank survey showed higher inflation expectations for 2018 and 2019 relative to the previous survey, reflecting the sharp depreciation of the peso.

The depreciation of the ARS in August, coupled with pending adjustments in regulated prices, led to a further deterioration of inflation expectations for this year. Analysts expect inflation to hit 44.8% by December 2018, up from 40.3% in the previous survey (Itaú forecast: 45%). Market participants expect inflation to decelerate to 31.9% over the next twelve months (+0.4 pp vs. August survey) and to 27% by December 2019 (+1.7 pp vs. previous poll, in line with our forecast).

Expected core inflation increased again. Pundits expect core item prices to increase by 44% in 2018 (up from 40.5% previously) and 25.9% in 2019 (from 24.5%). We note, however, that the expected core inflation for the next twelve months fell slightly, to 30.1% from 31% in the August survey.

The new monetary policy framework (monetary aggregate targeting) can stabilize inflation expectations, also considering that the real exchange rate has already corrected substantially, turning further weakening of the peso (in real terms) less likely. The central bank committed to a zero growth rate for the monetary base and a floating exchange rate (with an ample non-intervention zone). Under the new scheme, the yield paid on short-term central bank notes (7-day Leliq) averaged 68% in the first two auctions of October. The monetary authority also committed to not allow short-term rates to fall below 60% until 12-month inflation expectations decline for at least two consecutive months. We expect the new monetary framework to lead to higher interest rates in the near term, but expect the reference rate to decline to 60% by year-end. Market participants expect the reference rate to average 65% in October and November, and to fall to 60% in December.