Itaú BBA - Evening Edition – Central Bank tightens the monetary policy in Argentina

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Evening Edition – Central Bank tightens the monetary policy in Argentina

March 1, 2019

The decisions go in the right direction, given the deterioration of the inflation outlook and the proximity of the wage bargaining season

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The monetary policy committee decided to tighten the monetary policy stance given the still-high level of inflation.

Additionally, the new monthly targets for monetary base during the period March-May are zero growth relative to the actual average February level (instead of the original target for that month). We note the actual February monetary base level was 3% below the target for the month.

The central bank also reduced the maximum expansion of the monetary base due to exchange-rate interventions. The new limit is 2% of the February monetary base (previously 3%) subject to maximum daily interventions of USD 50 million (previously USD 75 million). We note that purchases of dollars may happen if the exchange rate falls below the lower bound of the non-intervention zone. Asymmetrically, the maximum daily sales of dollars, if the peso weakens above the upper bound, remains at USD 150 million. These interventions are not sterilized and will adjust automatically (upward or downward) the monetary base targets if they occur.

In our view, the decisions go in the right direction, given the deterioration of the inflation outlook and the proximity of the wage bargaining season.

Week Ahead: On Wednesday, the central bank will release its monthly expectations survey. We expect a new deterioration in inflation expectations due to the higher-than-expected reading in January and the gloomy outlook for the coming months due to the adjustment of regulated prices, amid the start of the wage negotiation season. Manufacturing and construction data for January will also see the light on Wednesday. We expect to see a new year-over-year drop in manufacturing (-14.7% in December). On Thursday, the car-makers association (ADEFA) will release February data on production, exports and domestic sales to car dealers. We expect some recovery in car production in 2019.


The trade surplus in February reached $3.7 billion, somewhat below our forecast ($4.1 billion) but above market consensus ($3.0 billion). Exports as well as imports declined during the month. The surplus over 12 months remained at $58 billion, while the seasonally-adjusted annualized quarterly moving average slid to $71 billion from $72 billion in January.

February figures point to a modest advance in the trade balance. Although exports declined, imports also shrank during the month and the trade surplus remains at a high level. We expect the 2019 trade surplus to virtually match last year's reading, with increased exports and imports.

Week Ahead: Due to the local holidays, we expect an empty week ahead both in terms of data releases and a likely slow news flow. Nevertheless, the market will remain focused on updates about the pension reform, which we’ll be monitoring closely.


The current account deficit widened sharply in 2018, as internal demand strengthened and oil price plummeted at the back end of last year. The USD 3.7 billion deficit in 4Q18 was USD 1.6 billion larger than in 4Q17. The resulting deficit for the year was 3.8% of GDP, above our 3.6% forecast and the 3.3% in 2017. At the margin, our own seasonal adjustment shows the deficit increased to 5.0% of GDP in 4Q18 from 3.3% in 3Q18, led by a widening trade deficit for goods.

Low oil prices, domestic demand recovery and some slowdown of the global economy have hampered the outlook for an external-account correction. We see the 2019 current-account deficit remaining wide (3.5% with an upside bias) and possibly playing a role on monetary policy decisions. Previously, an elevated current account deficit prevented the central bank board from moving to an expansionary monetary position despite activity weakness.

Economic activity grew 2.7% last year, above our 2.6% expectation, but after a downwardly revised 1.4% growth for 2017 (from 1.8%). In the final quarter of 2018, activity rose 2.8% (in line with our expectations; 2.9% market consensus; 2.7% in 3Q18), led by robust consumption and recovering investment, while soaring imports led to a growing net exports drag. Overall, the gradual activity recovery continues to unfold but growth likely remains below potential, so the negative output gap continues to widen. Hence, with inflation near the central bank’s 3% target and the external scenario still uncertain, the policy rate is likely to remain stable at a mildly expansionary level for the time being.

We expect activity to consolidate its recovery this year. Growth of around 3.3% would come amid an expansionary monetary policy. Risks to our scenario include a weak labor market, less favorable oil prices (relative to 2018), external financial conditions (given Colombia’s wide current account deficit) and a challenging fiscal outlook.

The coincident activity indicator (ISE) in December came in below market expectations and moderated at the margin. The original series slowed to 1.9% yoy from the 3.5% recorded in November, and was closer to our 2.3% expectation than to the market consensus. Growth in 4Q18 was 2.8% yoy (broadly stable from the previous two quarters) and showed a similar sectoral composition to GDP data published on the same day. Once corrected for calendar and seasonal factors, activity shrunk a mild 0.1% mom (+0.6% in November 2018). At the margin, activity moderated to 2.6% qoq/saar (+3.1% in 3Q18), also in line with national accounts data, showing activity entered 2019 with a weak momentum.

The January national unemployment rate of 12.8% was above the 11.8% recorded one year earlier, explained by higher urban unemployment. The urban unemployment rate increased to 13.7% from 13.4% (one year earlier), in line with the market consensus (13.7%) and our 13.6% expectation. Yet, the seasonally adjusted labor market series showed urban unemployment falling 0.6 percentage points from December to 10.7%, while further loosening in rural areas (to 10.1% from 9.3%) led to total unemployment picking up to 10.4% (10.2% in December).

In all, the labor market of Colombia remains weak, despite some growth improvement, which is consistent with the central bank’s (and our) view that growth remains below potential. Thus, the numbers reinforce our view that interest rate hikes are still far.
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Week Ahead:  On Monday, the institute of statistics (DANE) will publish exports for the month of January. We expect January exports to come in at USD 3.228 million, contracting 2.9% from last year (-14.6% previously). On Tuesday, inflation for the month of February will be release. High frequency data for February indicates a month-over-month inflation of 0.72% (0.71% last year), influenced by seasonal factors, resulting in annual inflation of 3.16%. 


February’s CPI posted a month-over-month rate of 0.13% (from 0.25% a year ago), below our forecast of 0.24% and median market expectations of 0.23%. Transport and communications were the main drag to the headline figure, contributing negatively 6 bp due mainly to lower gasoline prices (associated to the fall in oil prices). In contrast, household costs contributed positively with 7 bp as a result of higher residential natural gas tariffs.

Annual headline inflation reached 2.0% year-over-year in February (from 2.13% in January). According to the breakdown, core inflation (excluding energy and food items) remained practically unchanged at 2.39% year-over-year in February (compared to January). In turn, food and beverage prices decelerated slightly to 1.49% year-over-year in February (from 1.53% in January), while gasoline prices decelerated to 0.72% in February (from 4.99% in January). 

We forecast annual headline inflation of 2.6% by the end of 2019, supported by a recovery of domestic demand. Lower energy prices have been exerting downward pressure to the CPI the last couple of Months (January and February). However, core inflation (excluding energy and food items) seems stable, reflecting the state of the economy.
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Week Ahead: On Thursday, the Central Bank of Peru (BCRP) will announce its March decision on the reference rate, which we expect to remain unchanged. 


Week Ahead: On Thursday, INEGI (the statistics institute) will publish CPI inflation corresponding to the full-month of February, which we expect to come in at 0.04% month-over-month.  Assuming our forecast is correct, headline inflation would be 4.01% yoy (from 4.37% in January). Ending the week, the Statistics Institute (INEGI) will announce December’s gross fixed investment, which we expect to decrease 5.4% yoy (from -3.2% in November). 


Week Ahead: On Monday, INE will publish private consumption activity indicators for January. Still low consumer sentiment and mild new car sales point to retail sales growth of 1.7% in January. On Tuesday, the central bank will publish the GDP proxy (Imacec) for the first month of 2019. Overall, we expect a 0.3% growth (sa) from December and an annual growth of 2.6%. On Thursday, the central bank will publish the trade balance for the month of February. We expect a trade surplus of USD 650 million (USD 1.3 billion one year earlier) in February. Nominal wage growth for January will also be released on Thursday. On Friday, inflation for the month of February will be released. High frequency price tracking points to consumer prices rising 0.1% from January (in line with one year ago), driven by the seasonal rise in apparel and readjustments of rental contracts, resulting in annual inflation remaining stable at a low 1.8%.

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