ARGENTINA – Monetary policy decision: disinflation not enough to trigger rate cuts, ye

The central bank kept the monetary policy rate unchanged at 26.25% in its first meeting of June.

The central bank kept the monetary policy rate unchanged at 26.25% in its first meeting of June as expected and removed the tightening bias from the statement (“ready to act if necessary”). This is the fourth consecutive time the reference rate (7-day repo rate) is left unchanged after a 150-bp hike on April 11. The central bank noted the INDEC’s May inflation for both headline (1.3% mom) and core reading (1.6% mom) were below those for April (2.6% and 2.3% respectively) confirming the disinflation process has resumed. Disinflation was reflected also in different CPI’s tracked by other provincial and municipal statistical agencies. In addition, the high-frequency indicators monitored by the central bank suggest the disinflation process continues in June (in fact, according to private estimates, inflation could fall to around 1% month-over-month in June).

In our view, the more benign inflation data was the key reason behind the removal of the tightening bias. Still, the behavior of inflation expectations for some tenors (2017 and 2018) increased recently, remaining above the upper bound of the target range, so a rate cut was probably seen by the central bank as premature.

As the process of disinflation consolidates, there will be cuts in the reference rateahead even though the path of inflation remains inconsistent with meeting this year’s target. In this context, we expect the repo-rate to end this year at 22%. It is hard to predict when rate cuts will start, but we can’t rule out moderate reductions later this month (June 27) or in the first policy decision of the next month (July 11), as long as incoming data confirms the disinflation process. Finally, we note that also on July 11, INDEC will publish the new national CPI and provide year-to-date numbers for the new series. We don´t expect the index-change itself to influence the central bank’s decisions given the difference between the current index(which covers the City of Buenos Aires and neighboring counties ) and the national one are likely to be small.

Fuente: ITAU

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