Higher-than-expected inflation is weakening the support for inflation targeting

ARGENTINA - Forecast 20 Apr 2018 by Domingo Cavallo

The rate of inflation in the first quarter of 2018 has deviated significantly from the targets set by the Central Bank and the forecasts of most private consultants, ourselves included. The deviation was particularly large in March, and the online price indicator suggests that it will be even larger in April as a consequence the new adjustment in regulated prices.

In contrast with this bad news on the inflationary front, the government has shown that during the first quarter, the fiscal targets were met and, in some cases, were exceeded, as in, for example, the primary surplus. In addition, indicators of the level of economic activity show that the 3% GDP growth target for 2018 is still achievable. Even though higher-than-planned inflation complicates the social scenario for the government, the risk of a significant slowdown in growth or, worse, a recession, is considered much costlier politically.

To prevent a sudden stop in foreign financing for the government, the Ministry of Finance has decided to reduce the issuance of foreign bonds and will try to finance a higher proportion of its needs in the local capital markets. This in itself will mean some crowding out of the private sector. Therefore, the Central Bank will have less room to implement a tight monetary policy that avoids recessionary effects.

Faced with the dilemma of choosing which target to prioritize, we predict the government will decide in favor of growth and will suggest that in terms of inflation, all it expects it is a gradual reduction, sidelining the references to quantitative targets. As an instrument of monetary policy the Central Bank will use not only the management of interest rates, but also the net sale of reserves in the foreign exchange market. The emphasis will shift from the first instrument to the second.

In this report, we adjust our forecasts for 2018 and 2019, particularly in relation to the rate of inflation and all the nominal variables. We keep our previous figures for GDP growth and the rest of the real variables.

Now read on...

Register to sample a report

Register
Sign-in
Forgot your password?
Copyright 2024 GlobalSource Partners. All rights reserved. This forecast is prepared for GlobalSource Partners’ clients and may not be redistributed, reproduced, stored in a retrieval system, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of GlobalSource Partners. This forecast is distributed simultaneously to our website and other portals used by GlobalSource Partners. The information herein was obtained from various sources and is believed to be reliable but GlobalSource Partners does not warrant its completeness or accuracy. Neither GlobalSource Partners nor any Country Analyst, officer or employee accepts any liability whatsoever for any direct, indirect or consequential damages or losses rising from any use of this forecast or its contents.