Is the monetary bet going sour?
Much of market’s attention will be focused on this Sunday’s midterm elections and the likely political implications of the reshuffling in Congress, in particular, the new political balance ahead of the 2018 budget approval or the announced labor and tax reform. The electoral battle in the Province of Buenos Aires between the government and Cristina Fernandez de Kirchner will also attract interest.
But in this report we focus on the recent inflationary data and the monetary steps taken by the Central Bank to control it. Despite the optimism of the monetary authorities regarding the 2018 inflation targets, as expressed in the last IPOM meetings, we are concerned that the efficiency of the sterilization policy is being stretched too far, as the cost of LEBAC debt rises to a point where it risks becoming a monetary boomerang.
Overall M0 growth stands today at 27% y/y, well above the 17% inflation ceiling for 2017 plus a hypothetical 3% real GDP growth. Despite the fact that much of that growth is linked to dollar acquisitions that strengthen the BCRA balance sheet, it casts doubt on the authority’s ability to maintain its inflation and FX targets for the coming years.
We would not be surprised if the BCRA used its accumulated reserves to eventually unwind part of the LEBAC position.
Yearly inflation rose again in annual terms in September. INDEC GBA CPI rose to 24.2% y/y from 23.1% in August and 21.5% in July.
On a more positive note, September total tax collection reached AR$1.9bn, growing 33.1% y/y, and inflation-adjusted activity-linked tax collection maintained an 8% y/y growth rate, after smoothing the time series with a 3-month moving average.
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