Argentina:More aggressive central bank
Argentina’s central bank, Banco Central de la Republica Argentina
(BCRA), kept the key policyrate on hold at its meeting on 22 August, an
outcome both we and consensus had expected.
Regular readers are familiar with our out-of-consensus, strongly held
view on Brazil. We havelong argued, with high conviction, that interest
rates in Brazil would drop much lower thanpeople expected. As it turns
out, the market consensus on rates has repeatedly drifted our wayover
the last year (see Chart 1).
As expected, the Central Bank of Taiwan (CBC) left its benchmark
discount rate unchanged at1.375% for the sixth consecutive quarter
today. In its previous moves, the CBC had cut interestrates by a
cumulative 50 bps at its quarterly decision meetings between 3Q15 to
Nevertheless, we have put back our expectation of rate cuts from
September towards the end ofthe year, in light of the reinforced
tightening bias evident in both its statement and its recentaggressive
intervention in the secondary market for liquidity paper – a clear sign,
in our view,that rates will remain high for longer than we had
Indeed, judging by the central bank’s regular survey of analysts,
the consensus forecast on end-2017 rates has now fully converged with
our 8.0% call. That worries us – while we lovebecoming consensus, we
hate being consensus. Based on recent developments, however, weare
changing our call: while we re-affirm our below-consensus terminal Selic
rate call of 7.0%for end-2018 (see Brazil’s rates: The magnificent
seven, dated 16 May), we lower our end-2017forecast to 7.5% from 8.0%.
The CBC said that it will maintain appropriately loose monetary
policy and that the interest rateis appropriate for current level of
growth. While reiterating that it sees output gap remaining inthe
negative territory next year, the CBC also said that current inflation
is stable and outlook ismild. Comments point to CBC’s bias to stay on
hold for the time being.
At August’s monetary policy meeting, the BCRA reiterated that it
will maintain its anti-inflationarybias to ensure the disinflation
process continues towards the official targets: 12–17% in 2017(which
looks very unlikely, in our view) and 10% +/? 2% for 2018 (challenging,
but notimpossible). The bias reflects the discomfort with above-target
inflation expectations (seeChart 1) and stubbornly high core inflation
(1.8% m/m in July).
As for the specific rate path from here, we foresee a cut of 100bp
next week, rather than the75bp we previously expected. The central bank
is likely to slow down its pace eventually, so wenow pencil in cuts of
75bp in September and 50bp in both October and December, pulling
thepolicy rate down to 7.5% by end-2017. Early next year, two
consecutive 25bp cuts in Februaryand March would lower the Selic to a
terminal rate of 7.0%. If anything, we think risks lookbiased for the
policy rate to reach 7.0% even sooner than that.
The central bank also raised slightly its GDP and inflation
forecasts for 2018 to 2.35% (from 2.29%in Nov forecast) and 1.12% (from
0.96%). Notably, this is well below the “most appropriate”inflation rate
of 2% cited by Governor Perng Fai-nan. The CBC will maintain M2 growth
target of2.5-6.5% in 2018.
Importantly, the BCRA also explicitly stated this time that “it will
continue to restrict liquidityconditions through active secondary market
operations in the Lebac market”. In fact, it hasintervened actively
since the day of the monetary policy meeting to lift rates by 140bp in
the sixtonine-month area of the Lebac yield curve. In the short-end,
meanwhile, the rise in yields wasmore modest (20–40bp on average).
At its latest monetary policy meeting, on 31 May, heightened
political uncertainty saw thecentral bank indicate an inclination to
slow down its rate-cutting pace from 100bp in May to75bp next time, on
26 July (see Brazil’s COPOM: Reform uncertainty hurts). Since
then,however, conditions have improved and initial worries have
While exports numbers signaled positive momentum going into 2018
(exports and new exportorders growth rebounded to 14.0% y/y and 11.6%
y/y respectively in November) , the lack ofdemand-side inflationary
pressures coupled with risk of export slowdown in 2H18 are expectedto
keep the CBC on hold next year.
亚洲城唯一官方网站手机端， The central bank has recently intervened actively in the markets in
a bid to flatten the Lebacyield curve (Chart 2). We view this as a sign
that rate cuts will now take longer to materialisethan September, our
previous expected date for the start of the easing cycle. In our
opinion, thecentral bank’s recent, more aggressive intervention suggests
that the start of the easing cyclewill now be delayed to late Q4. The
BCRA appears to be clearly focused on keeping peso realinterest rates
firmly in positive territory.
Above all, political developments are proving to be disinflationary,
not inflationary. Indeed, weare now lowering our own end-2017 inflation
forecast to 3.0% from 3.5%, as inflation prints keepsurprising to the
downside. Here, too, the consensus view has steadily moved our way
(seeChart 2). In part helped by the recent announcement of credibly
lower inflation targets for thecoming years, longer-term inflation
expectations also remain remarkably anchored (see Brazil’snew inflation
target: Expect more, pay less).
Headline inflation has been weighed down by lower food prices mainly
due to a high base effect.
We expect the disinflation trend to remain firmly intact. We
forecast inflation will end the year at20% y/y (slightly up on our
previous 19% forecast) and then decline to 12% in 2018. Thedisinflation
trend will eventually pave the way for the BCRA to start guiding rates
lower, in ourview. For the time being, though, we expect rates to be
kept high in order to bring inflation downto levels that the central
bank considers more reasonable. We expect the policy rate to be cutfrom
the current 26.25% to 24.75% by the end of this year (above our previous
23.25%forecast) and forecast a stable monthly easing pace of 100bp in H1
In addition, the currency has stabilized, in part supported by
relatively benign internationalconditions. Last, but not least, the
domestic political situation has calmed down, while structuralreforms
are advancing in Congress (see Brazil: Reforms delayed, diluted, but not
Any subsequent recovery will likely be fairly subdued. We are
expecting a slightly higher inflationrate of 1.0% in 2018 compared to
around 0.6% this year. The impact of the 3% wage hike forpublic sector
employees from January 2018 remains to be seen, depending on whether
this willbe translated to wage increase in the private sector and the
potential boost for private demand.
One of the comments in the policy statement was the recent
appreciation of the TWD whichtightened the financial condition in the
country. Governor Perng said that the appreciation in thecurrency has
offset imported inflation and also highlighted the greater impact of the
exchangerate than interest rates on growth.
The TWD has appreciated by around 7.6% against USD YTD, making it
one of the bestperformingcurrencies in Asia. Further strengthening will
be limited as CBC maintains its existingaccommodative monetary policy
while US continues to normalize and some of the Asian centralbanks are
moving to reduce their monetary accommodation. We maintain our forecast
of rangetrading in USD/TWD around 30.00 across 1H2018 before rising to
30.20 in 3Q18 and 30.50 in4Q18. The supportive outlook for TWD in 1H18
should continue to cap risks of imported inflation.
Note that this is the last monetary policy meeting presided by
Governor Perng as his term endsin February 2018 after leading the
central bank for 20 years. The next rate decision will be on 22Mar 2018.
Market expects that a promotion from within the CBC to succeed Perng to
maintainthe policy continuity.