Once more inflation came in below expectations, yet the BCRA maintains interest rates
Despite expecting some moderation in the inflation level, June's result was, once again, undoubtedly lower than anticipated. But what makes the June result more interesting than May's outcome is that its “more benign” results cannot be explained by mere seasonal factors, and the results were more evenly distributed among the different CPI sub-sectors. As a consequence, June's implicit annual inflation dropped quite significantly, from 139% y/y to 110% y/y.
Despite this drop, the monetary authority announced late yesterday that it would not modify the reference interest rate, keeping it at an effective annual rate of close to 155%, a rate well above not only the backward-looking annual inflation rate but now also now above the more forward-looking implicit annual inflation. The BCRA's reaction function seems to be to raise the reference interest rate whenever the forward-looking inflation rate climbs above it but to keep interest rates constant when the forward-looking inflation falls below the reference interest rate.
That said, in the medium term, the inflation perspectives remain grim, given the BCRA's rising remunerated liabilities and declining reserve levels, which reinforce the concern of a possibly disorderly devaluation of the official FX rate. For now, however, this should support interest rate-bearing instruments relative to CER-adjusted debt.
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