Tuesday, June 26, 2018

Argentina maintains rate, contractionary monetary bias

      Argentina's central bank left its monetary policy rate at 40.0 percent and said it would maintain the current contractionary bias of monetary policy until the trajectory of inflation, and inflation expectations, are aligned with the goal lowering inflation to 17 percent by December 2019.
      Today's policy decision and guidance by the Central Bank of the Argentine Republic (BCRA) is the first since former Finance Minister Luis Caputo took over as governor from Federico Sturzenegger, who resigned on June 14.
       The central bank has kept its policy rate at 40 percent since early May following three sharp rate hikes in 12 days, raising it by 12.75 percentage points since April 27.
      Since Sturzenegger's resignation, in the wake of the U.S. Federal Reserve's more hawkish posture and the International Monetary Fund's (IMF) US$50 billion support package, the rout in the peso has come to a halt and the exchange rate has stabilized in recent days.
      Today's guidance by the central bank is slightly more specific than its previous policy statement from June 12 when it also said it would maintain the current contractionary bias but did not include the goal of lowering inflation to 17 percent by December 2019.
       As part of the agreement with the IMF, new inflation targets have been set and a new central bank law will strengthen the operational and financial autonomy of the central bank.
       Before the next monetary policy decision on July 10, BCRA said further changes to the monetary policy framework would be announced while the central bank will continue to intervene in the secondary market for short-term peso debt (LEBAC) to reinforce the monetary policy signal.
       For 2018 the central bank has eliminated its previous inflation target of 15 percent and replaced it with a target that aims for inflation below 22 percent for the second quarter of 2019, the first 12-month period that will be judged under the new policy framework.
       For 2019 the central bank will now target inflation of 17 percent, up from the 10 percent that was set last December.
       For 2020 inflation of 13 percent will be targeted, up from 5 percent, and for 2021 inflation of 9 percent will be targeted. By 2022 the central bank is targeting inflation of 5 percent, its estimate of price stability.

       Argentina's inflation rate rose to 26.3 percent in May from 25.5 percent in April, partly reflecting the depreciation of the peso, and the central bank said the current outlook for inflation continues to call for a contractionary bias of monetary policy.
       Market expectations for inflation remain above the 2019 inflation target and the central bank acknowledged the risk of higher-than-expected inflation from a larger-than-expected transfer of the exchange rate to retail prices. 
       The peso was trading at 27.08 to the U.S. dollar today, up 4.7 percent since a low of 28.35 on June 15 but still down 31 percent since the start of 2018.
       BCRA also said economic activity up to March had been good but data for April and May show a deceleration, partly due to the income effect of higher inflation.
       Argentina's agricultural sector is also suffering from extraordinary drought and BCRA said it may take a few more months for the economy to regain its "previous vigor."
        It estimates growth slowing to close to 1 percent in 2018 before improving in 2019.
       The IMF forecast 2018 growth of 0.4 percent, down from 2.9 percent in 2017. In 2019 growth is forecast to improve to 1.5 percent and then to 2.5 percent in 2020.
       Inflation is seen ending this year at 27 percent, then 17 percent in 2019 and 13 percent in 2020.


Post a Comment