BCRA expects the latest hike to consolidate the declining trend in core inflation, but additional hikes are possible.
Talk of the day
Our LatAm Macro Monthly report was published yesterday, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru, the global economy and commodities. ** Full story here.
Argentina’s central bank raised the monetary policy rate by 100bps, to 28.75%, following a 150-bp hike two weeks ago. The decision was surprising given the size of the previous hike. In the press release announcing the decision, the central bank noted that inflation expectations continued to rise after the September inflation reading was published. According to the latest Central Bank Survey of Expectations, analysts expect 23% inflation in 2017, surpassing the 12%-17% target range for this year. Participants revised their 2018 inflation forecasts upward for a fifth consecutive time, to 16.0% (from 15.8% previously). For the next 12 months, the market expects inflation of 17.3% (surpassing the 16.9% posted in September). Both readings exceed the upper bound of the 10% (±2%) target range for next year.
The central bank expects the latest hike to consolidate the declining trend in core inflation, but the options remain open and additional hikes are possible. The central bank will conduct a new auction of short-term sterilization instruments (Lebacs) next week. The outcome may shed light on the central bank’s next steps. ** Full story here.
The minutes of the October monetary policy meeting show that a united board voted to leave the policy rate at 2.5%. The relevant options presented by the technical staff were to hold the rate and retain a neutral stance or to cut it by 25bps while including an easing bias. In the end, a cautious board opted for a mix, by staying on hold but adding an easing bias as the recent behavior of inflation requires further evaluation.
Our baseline scenario is for the central bank to leave the policy rate unchanged at 2.5% for the rest of this year and most of 2018. However, considering the supporting performance of the CLP and inertia, risks for our inflation forecast (2.8% in 2018) are tilted to the downside, so we cannot rule out the possibility of additional easing. Incoming inflation data, such as the October inflation print, will be a key input into whether risks to the inflation outlook are intensifying. We expect a 0.3% gain from September (compared with 0.2% one year before). ** Full story here.
Strong export growth continues to limit Chile’s external vulnerabilities. The trade balance recorded a USD 583 million surplus in October, above market expectation and our call (both at USD 450 million). A widespread improvement in exports, led by the mining component, is behind the improving trade balance in Chile. The accumulated 12-month trade surplus is USD 6.1 billion (USD 5.3 billion in 2016), the highest since June 2015. Our seasonally adjusted series shows that, at the margin, the trade balance surplus picked up to USD 13.7 billion (annualized) in the quarter ending in October, largely due a widespread improvement in exports, from the USD 12.1 billion annualized surplus recorded in 3Q17 (USD 2.7 billion in 1Q17).
With copper prices expected to stay elevated and internal demand still weak, Chile’s current-account deficit will likely remain at low levels. We see a current-account deficit of 1.4% of GDP this year, in line with the deficit recorded in 2016. Next year, we expect the deficit to narrow to 1.2% of GDP. ** Full story here.
In September, real wage growth remained broadly stable at 2.4%. Nominal wages increased 4.1% year-over-year in September (according to the historically merged series), versus 4.2% in August and 4.2% in 3Q17 (4.4% in 2Q17). As inflation dipped to 1.5% in the month, real wage growth ticked up to 2.4% year-over-year (2.3% in August) and 2.5% in the quarter (2.0% in 2Q17). The real wage bill growth was broadly stable at 4.8% in the quarter (3.9% in 2Q17) when total employment growth is considered. Meanwhile, when only salaried employment is included, growth of the real wage bill in the third quarter dropped to 3.2% year over year (3.5% in 2Q17). Real wage growth will likely stay elevated ahead as inflationary pressures remain contained, however, the fragile composition of the labor market means that support for private consumption is contained.
We published our Scenario Review for the month of November. We increased our 2017 inflation forecast to 3.3% due to greater pressure from regulated prices. Our estimate for 2018 remains at 3.8%. Also,we anticipate GDP growth of 0.8% in 2017 and 3.0% in 2018, but we do see risks. We revised downward our forecast for unemployment at year-end 2018 to 11.8% from 12.0%, incorporating better than expected job creation in the informal sector in 3Q17. ** Full story here.