Argentina's central bank lowered its monetary policy rate by 75 basis points to 28.00 percent to prevent "a contractionary bias of monetary policy" as the disinflationary process is persisting despite expectations that inflation in December will reflect a strong rise in the regulated prices of gas and electricity.
The rate cut by the Central Bank of Argentina (BCRA) comes after it raised its rate three times in 2017 by a total of 400 basis points to curb rising inflation as the government of Mauricio Macri continues to cut a wide range of subsidies to boost economic growth and reduce the fiscal deficit.
The BCRA said core inflation in the last three months was close to 18 percent in annualized terms and data showed this favorable dynamic persisted through December and in the first days of January, necessitating a cut in the reference rate to prevent a contractionary bias in monetary policy.
Argentina's headline inflation rate eased to 22.4 percent in November from 22.7 percent in October while core inflation eased to 21.2 percent from 21.7 percent, according to the BCRA.
The central bank has emphasized in recent months that inflation has broken the level of persistence that was seen from mid-2016 to mid-2017 but monetary policy maintained a strong contractionary bias to avoid any spillover from higher regulated prices to core inflation.
The BCR said it would be "cautious" in adapting monetary policy to the new path of disinflation and "a moderation in the contractionary bias can only be sustained over time to the extent that the evolution of disinflation is compatible with the trajectory sought."
It added it would conduct monetary policy to reach its target of 15 percent inflation in 2018.
In late December Argentina's government pushed back its aim to lower inflation to 5 percent by one year to 2020 and raised its 2018 target to 15 percent from 8-12 percent. For 2019 the inflation target is 10 percent.
The BCRA said core inflation in the last three months was close to 18 percent in annualized terms and data showed this favorable dynamic persisted through December and in the first days of January, necessitating a cut in the reference rate to prevent a contractionary bias in monetary policy.
BCRA said inflation was expected to rise to 17.4 percent from 16.6 percent due to a change in regulated prices while core inflation was expected to remain stable at 14.9 percent.
Expectations for 2019 headline inflation rose to 11.6 percent from 11.3 percent while expectations for core inflation fell to 10.0 percent from 10.4 percent. For 2020 the forecast was 8.0 percent.
Earlier this week Argentina returned to the international debt market by placing $9 billion in bonds, with demand more than double than the amount issued.
Last month the International Monetary Fund forecast 2018 inflation of 16.3 percent - above the government's 15.0 percent forecast - 2019 inflation of 11.8 percent and 10.0 percent in 2020 while growth is seen at 2.5 percent.
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