Itaú BBA - ARGENTINA - Monetary policy report: the central bank is likely to hold off on raising the policy rat

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ARGENTINA - Monetary policy report: the central bank is likely to hold off on raising the policy rat

October 19, 2017

Not ready to increase interest rates further

In the press conference accompanying the presentation of the report, Governor Federico Sturzenegger recognized the persistence of core inflation but expressed confidence in the disinflation process.  Sturzenegger noted that core item prices increased 1.7% month over month on average in 1Q17 and 2Q17, and it fell only slightly, to 1.6%, in 3Q17. The president of the central bank downplayed the September inflation reading (1.9% for the headline and 1.6% for the core), which showed an acceleration of inflation relative to August. Instead, he insisted that monitoring the evolution of the disinflation process from a broader perspective is the right approach. Sturzenegger argued that monthly inflation showed consistent lower readings in 2017 (on average 2.0%, 1.8% and 1.7%, respectively, in the first three quarters of the year). 

Furthermore, high-frequency indicators show a more benign behavior for inflation in the first half of October, according to the central bank. Sturzenegger presented statistics provided by PriceStats and Elypsis, which showed a deceleration in consumer prices. The gains were attributed to the lagged effect of the tightening of the monetary policy that occurred after March.

The central bank acknowledges a “gap of credibility” but sees room to put inflation on track to meet the targets for the next years. Inflation expectations are above the targets set by the monetary authority for the period 2018-2019 (15.8% vs. 10%±2% and 11 % vs 5%±1.5% respectively). Still, the monetary authority expects the current monetary stance to reduce inflation in 4Q17 to around 1% monthly, a level considered by the central bank as consistent with meeting the 2018 target.

All in all, the central bank does not look ready to hike the reference rate soon, but the absence of further progress on disinflation may lead to a new tightening. The central bank keeps the policy rate (center of active and passive 7-day repo rates) at 26.25%, which means an ex-ante real interest rate of around 10% (using inflation expectations for the next three months). We expect the monetary authority to maintain the policy rate at the current level until the end of this year, but there is potential upside due to the challenging inflation outlook, given the stronger growth of credit and activity and the proximity of a new round of hikes in regulated prices.


Juan Carlos Barboza
Diego Ciongo

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