​BCRA tightens again monetary policy, will the economy stand the pressure?

ARGENTINA - In Brief 12 Apr 2017 by Esteban Fernandez Medrano

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In Yesterday’s Monetary Policy Meeting, the BCRA decided to raise its reference rate by 150bps. It maintained the 75bps spread around it to define the 7 days active and passive repo rates. This represents the first hike since February 2016 and brings the reference rate back to where it was in Nov 2016, when the active-passive spread was still 700bps (350bps around the reference rate). The signal the BCRA sends to the market is clear. It is willing to tighten monetary policy to maintain its inflation targets. Or put differently, Sturzenegger is willing “to take the head” for cooling down the economy. The central president faces the dilemma of maintaining the credibility of its inflation targets, which from the beginning were perceived as somewhat optimistic. As we have being pointing out in our in previous reports, the monetary growth caused by the cost of sterilization, treasury financing and lately the acquisition of dollars, due to the tax amnesty, generated a significant exogenous monetary expansion that now requires the implementation of a tight interest rate policy to compensate with endogenous adjustments. In line with that view, last month’s inflation has remained above what would be desirted to reach at the 17%y/y annual cap at the end of the year. And recent inflation was not only caused by relative price adjustments (tariffs). Yesterday’s publication of March INDEC-IPC was the straw that broke the camel’s back. Monthly inflation came in at 2.4%m/m, on top of February’s 2.5%m/m, accumulating so far this year 6.3%, or 24.3% with respect to April 16 (past 11 months). Even though seasonal factors played a key role in March’s result (Clothing 4.8%m/m, Education 5....