Itaú BBA - ARGENTINA - Monetary Policy Decision: No room to cut rates now

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ARGENTINA - Monetary Policy Decision: No room to cut rates now

March 13, 2018

The central bank defended its recent interventions in the exchange market

Argentina’s central bank kept the benchmark interest rate (7-day repo rate) unchanged, at 27.25%, for the third consecutive time at its first monetary policy meeting in March. The decision was in line with our call and the rest of the market (30 analysts surveyed by Bloomberg did not expect changes in the policy rate). The tone of the statement was once again cautious, signaling no willingness to cut interest rates in the short term.
 

In the press release accompanying the decision, the central bank noted that the latest inflation expectation survey for 2018 showed a new increase, to 19.9% (from 19.4% in February; Itaú 20%). The median core inflation expectation for 2018 also rose to 17.1%, from 16.9% before.   

The central bank reiterated that, according to its high-frequency indicators, both headline and core inflation will be higher in February than those registered in January (1.8% MoM and 1.5% MoM, respectively), reflecting increases in both regulated prices and tradable good prices. Private estimates for headline inflation stand at around 2.45% MoM (Bloomberg survey). Indec (official statistics bureau) is scheduled to publish the figure on March 14. Last-12-month inflation stands at 25%, while the core reading is at 21.1% (in January). 

The central bank defended its recent interventions in the exchange market, arguing that further weakening of the peso is not justified by either by real shocks or the planned path for monetary policy. The monetary authority ratified the floating exchange-rate regime, adding that occasional interventions are complementary to monetary policy in cases of disruptive movements that may affect inflation dynamics and result in negative financial conditions. The central bank has sold a cumulative USD 522 million since March 5. Finally, the central bank stated that it will not ease monetary policy until it sees clear signs of disinflation, similar to the guidance provided in the previous decision.

We expect the central bank to stay put at least in its next policy decisions in March and April, given the challenging inflation environment, amid wage negotiations. Furthermore, we note exchange rate intervention can’t substitute tight monetary policy to contain pressures on the peso, especially considering the wide current account deficit and low level of net reserves.  

Juan Carlos Barboza
Diego Ciongo

 


 



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