he latest central bank survey of expectations revealed a new increase in inflation expectations and a sharp deterioration in growth forecasts for this year.   

Those surveyed expect inflation to be at 31.8% by December 2018, up from 30.0% in the June Survey, reflecting the impact of a weakening peso on core item prices. The expected core inflation for 2018 (year-end) was revised upward, to 30.5% from 28.2% before. Analysts now expect higher monthly headline inflation in August and September (2.2% and 2.0%, up from 2.1% and 1.9% respectively in the previous survey). The downward path of inflation for the next month remained almost unchanged, with only a slight revision for December (1.6% instead of 1.5%). In this way, analysts expect inflation to finish the year a tick down from the upper-band target  (32%) included in the letter of intent to the IMF.

The survey also showed a new increase in inflation expectations for 2019. Pundits forecast inflation at 20.6% next year (up from 20.2% before). The forecast, while above the inflation target set by the central bank for that year (17%), is still below the upper band tolerated under the IMF program (22%).

Survey participants now expect the monetary policy rate (currently at 40%) to start to decline gradually only after August. According to the survey, the reference rate (seven-day repo rate) will fall to 39% by September and to 35% by December this year (instead of 33% in the previous survey) and to 25.5% by the end of 2019 (up from 24.8% before).

Analysts once again made a sharp downward adjustment in their GDP growth forecasts. Participants expect the economy to contract by 0.3% 2018 (down from an estimate of 0.5% expansion in the June survey and 1.3% in the May survey). The growth forecast for 2019 was also revised downward, to 1.5% from 1.6% before. Finally, the survey reveals that participants see the exchange rate at 30.5 pesos to the dollar by the end of this year.

We note that the policy rate is not operative as the central bank is not removing liquidity through the 7-day repo rate.  Instead, the central bank turned the focus to controlling the expansion of monetary aggregates as a complement. Without announcing monetary expansion targets, the central bank has been mopping up liquidity increasing reserve requirements and participating actively in the secondary market for its short-term instruments (Lebacs). In the latest auction of Lebacs, the yield paid on the 30-day bill was 46.5%, slightly down from 47% one month ago. We see managing the monetary aggregates as the instrument, in the short run, to restore stability to the peso, given the strong restrictions on exchange-rate intervention (both on the spot and future markets) set in the agreement with the IMF.  We think the increase in inflation expectations leaves no room for monetary easing in the short-term.