Itaú BBA - Inflation surprises to the downside in Argentina, but Central bank stays put

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Inflation surprises to the downside in Argentina, but Central bank stays put

September 13, 2017

We see the policy rate at the end of this year at 25%, and we do not expect changes until the beginning of November.

Talk of the Day


National inflation decelerated by more than expected in August. Consumer prices gained 1.4% between July and August, below Bloomberg’s survey (1.5%) and down from 1.7% in the previous month. Prices have increased by 15.4% year-to-date, while last-three-month cumulative inflation fell to 18.7% (annualized) from 19.6%. In the greater metropolitan region of Buenos Aires, prices rose by 1.5% MoM in August (from 1.8% in July), bringing annual inflation to 23.1% (from 21.5% in July), mostly due to base effects. We note that the court ordered a reduction in gas prices in August 2016. National core inflation reached 1.4%, slightly below the 1.5% reading for the greater metropolitan region of Buenos Aires.

The adjustments in regulated prices scheduled for November and December continue to pose a challenge for inflation ahead. We see inflation at 22% by the end of this year (1.4% MoM average for the rest of the year), significantly surpassing the 17% upper bound of this year’s target range.

In this context, BCRA left the monetary policy rate unchanged at 26.25% for the tenth consecutive time. The decision was expected by both us and the market. The press release noted the central bank was opting to maintain a “contractive bias”, given that inflation expectations for December 2017 remain at 22% and expectations for 2018 have increased to 15.7% from 15.5% in the previous survey. The monetary authority highlighted once again that that the easing cycle in 2H16 led to higher inflation readings that forced it to reverse its monetary-policy stance in order to contain inflation. We think that even if there is a reduction of inflation expectations in the coming months, the central bank will likely stay put for a while, to minimize the risk of easing policy prematurely.

The central bank is targeting a sharp disinflation in the core reading. According to the high-frequency indicators tracked by the central bank, disinflation is on track to consolidation but core inflation remains at uncomfortable levels. The “anti-inflationary bias” (meaning a tight monetary policy) will be maintained to achieve the inflation target for 2018 (10% ± 2%). In addition, the monetary authority will continue draining liquidity through interventions in the secondary market for short-term sterilization bills (Lebacs). Our forecast for the policy rate at the end of this year stands at 25%, and we do not expect changes until the beginning of November. ** Full story here.


Copom minutes: preparing the end. The minutes from the Copom September meeting confirmed the message, presented in the statement, that the base case for now is a 75bps cut in October, provided current economic conditions, namely stabilization of economic activity amidst wide slack, especially in the labor market, remain unchanged. Looking farther ahead, two messages seem to stand out from the text. First, that the committee on the whole envisages a gradual end to the easing cycle, suggesting a flight path that would take the base rate gradually to the 7.0% neighborhood - as indicated by the forecasts presented in the text. The second message is that policy needs to retain flexibility to address downward and upward risks to the inflation outlook. Thus, while 7.0% seems to be the most likely end-point of the cycle, shifts in the scenario may lead the Copom to stray a bit from this. ** Full story here.

Broad retail sales rose 0.2% mom/sa, also beating the median of market estimates (-1.0%) and our forecast (-0.2%), and sustaining the sharp increase seen in June (2.3%). Compared to July 2016, broad retail sales rose 5.7%. The breakdown shows expanding and contracting sectors in balance, in line with the headline. Going forward, we expect retail sales will continue to recover in the coming months, although at a slower pace as contributions from disinflation and FGTS withdrawals fade out. We forecast a 0.2% gain in broad retail sales in August. ** Full story here.

Core retail sales remained stable in a seasonally-adjusted monthly basis in July, printing slightly above the median of market estimates and our forecast (0.2% and 0.1%, respectively). Compared to July 2016, core sales expanded 3.1%, marking a fourth consecutive gain after 24 months in negative territory. Our preliminary estimate for core retail sales in August is a 0.3% drop.

Paper cardboard dispatches (ABPO) rose 1.0% mom/sa in August (our seasonal adjustment), up 8.1% yoy. It is one of the two most important coincident indicators for industrial production (the other is traffic of heavy vehicles). The result is better than other industrial production coincident indicators already released and sets our preliminary industrial production forecast at 0.2% mom/sa in August (5.7% yoy), up for five months in a row.

Our monthly GDP proxy climbed 0.5% mom/sa and 3.1% yoy in July. The seasonally-adjusted monthly increase was not widespread across the indicator's components. Preliminary figures for August suggest a slight drop in PIBIU after an added gain of 1.6% in the two previous months. Yet, economic activity in Brazil is rebounding gradually, with noticeable advances in the industrial and retail sectors and in the labor market. The recent evolution of monthly GDP figures is consistent with such gradual recovery. ** Full story here.

The Service Sector Survey (PMS) for the month of July will come through today at 9:00 AM (SP time). We expect the headline to fall 0.8% year-over-year.


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