ARGENTINA – Inflation expectations remain sticky

The survey showed analysts revising their forecasts upward, likely in response to the higher-than-expected CPI in April

The latest survey of expectations in Argentina showed analysts revising their inflation forecasts upward for this year and the next, likely in response to the higher-than-expected CPI in April. Still, analysts’ forecasts remain consistent with a gradual disinflation process, which would likely be enough to lead the central bank to reduce interest rates. Analysts expect the economic recovery to continue, even though forecasts for growth this year fell slightly.

Inflation expectations for 2017 in the Greater Buenos Aires area increased by 0.6%, to 21.6% after consumer prices behaved much worse than expected in April (2.6% mom vs. 1.9% in the March survey). The central bank’s May survey showed that the median inflation expectation has been in the range of 20.8% to 21.6% through the year, consistently above the target set by the central bank (12%-17%). Our forecast stands at 22%.

We note that despite the deterioration in inflation expectations for the year, participants now expect slightly lower inflation in the coming months than in the previous survey. Analysts expect an average 1.36% in the June-October period, down from an average 1.42% in the April survey. Similarly, the expected inflation for the next 12 months fell to 16% from 16.2%. Consequently, the upward adjustment in expectations for 2017 reflects forecast errors in past inflation readings. Core inflation expectations increased 0.2% to 19.2% for 2017.

However, inflation expectations for 2018 have also deteriorated. Participants now expect 15%, up from 14.6% in the previous survey and one point below our current forecast (16%). The central bank targets an inflation range of 8%-12% for next year.

Besides, the survey revealed that inflation expectations at the national level are also rising. The poll showed an expected 2017 consumer-price increase of 21.4%, up from 20.5%. For 2018, participants expect 14.5% inflation (14% in the previous poll). We note that these expectations are slightly lower than those for the Greater Buenos Aires area, probably because the expected adjustments in regulated prices in the City of Buenos Aires and surrounding counties are higher than in the interior of the country. We note that the national CPI – to be released by Indec on July 11 – becomes the central bank’s target as soon as it is available.

Expectations for the year-end reference rate (7-day repo) increased to 22%, from 21.5% in April. Analysts expect the reference rate to start to fall by end-June, to 25.75%, from a current level of 26.25%. In our view, a reduction of the reference rate is likely if the process of disinflation is consolidated, even if meeting the 2017 target is unlikely. We expect a reference rate of 22% by December 2017. For 2018, the expected reference rate was adjusted to 16.1% in the survey, from 16% previously (Our forecast: 16%).

Economists cut their GDP growth expectations for this year to 2.6% from 2.7% (Itaú forecast: 2.7%). For 2018, analysts expect 3.0% growth (as in the previous survey and similar to our current forecast).


Juan Carlos Barboza

Diego Ciongo

Fuente: ITAU

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