Itaú BBA - ARGENTINA – Monetary Policy Decision: High interest rates in the near future. Activity starts to wea

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ARGENTINA – Monetary Policy Decision: High interest rates in the near future. Activity starts to wea

May 22, 2018

The central bank expects core inflation to remain at high levels in May

The central bank kept the benchmark interest rate (7-day repo rate) unchanged at 40% at its second monetary policy meeting in May. The monetary authority maintained an unusual wide corridor, with the lending rate at 47% and the borrowing rate at 33%, which it expects to normalize when market instability moderates.

The central bank expects core inflation to remain at high levels in May, given its high-frequency indicators (2.1% mom in April). In particular, the monetary authority expects the depreciation of the peso to keep consumer prices under pressure in the near term. As inflation remains higher than that projected for the rest of 2018 and given instability in emerging markets, real interest rates in the near future will continue significantly higher in the past.

While our current forecast for the reference rate stands at 30% by December, we don’t expect changes in the next meetings. 

On a separate note, the EMAE (official monthly GDP proxy) surprised expectations to the downside in March. Activity expanded 1.4% yoy in March (down from 2.8% and 3.3% expected by the market and us respectively). On a sequential basis, the economy fell by 0.1% mom/sa, following a 0.2% loss in February. January activity was upwardly revised to 0.9% from 0.7% previously leaving to a still strong quarter-over-quarter expansion of 4.3% (annualized). The EMAE expanded 3.5% yoy in 1Q18, down from 4% in 4Q17.

Growth in 1Q18 was led by Construction. The sector increased 10.8% yoy followed by Manufacturing, which expanded 3.1% driven by auto industry output (20% yoy). The Service sector grew 2.8%, while Agriculture and primary activities decreased 0.1% in the quarter driven by a 5.4% yoy drop in March related to the initial impact of the severe drought registered at the beginning of the year.

According to our seasonal adjustment, the primary sector and construction registered negative growth (-3.8% and -0.2% respectively) in March while Manufacturing and Services grew 0.2%. In the quarter ending March, Services (4.3% qoq/saar) and Construction (4% qoq/saar) continued to expand. The Agricultural sector decreased 1.4% qoq/saar while Manufacturing dropped 0.4% qoq/saar.  

We expect the economy to continue to decelerate markedly in the coming months. The impact of the drought will be harsher in 2Q18 while tighter macro policies and lower real wages will hinder domestic demand. The international environment (Brazil’s growth and financial conditions) is also less supportive. We see downside risks to our GDP growth forecast of 2.0% this year. 


 

Juan Carlos Barboza
Diego Ciongo

 



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