Argentina Keeps Inflation Focus as Rate Cut Less Than Estimates

(Bloomberg) -- Argentine central bank President Federico Sturzenegger cut the benchmark interest rate less than expected on Tuesday, making it clear that taming inflation remains the bank’s priority at the start of the year.

The bank lowered the rate on the 7-day repo by 75 basis points to 28 percent, according to an emailed statement. The median estimate had been for a 125 basis-point cut, according to a Bloomberg survey of 7 economists.

After bowing to pressure from President Mauricio Macri’s administration and raising inflation targets last month, Sturzenegger showed he still maintains a modicum of independence in his control of monetary policy, analysts said.

The manner in which the target change was announced was interpreted by investors as an erosion of Sturzenegger’s authority. It was Treasury Minister Nicolas Dujovne who announced the hike in the inflation target to 15 percent from 10 percent on Dec. 28, with Sturzenegger speaking second to merely endorse the decision. Given that real interest rates -- which discount inflation -- stand at 11 percent, Sturzenegger has space to lower rates without losing all of his credibility. A cut of 200 basis points or more would have been a signal it is the government in the driver’s seat, not him, according to Walter Stoeppelwerth, chief investment officer at Balanz Capital.

“Without a doubt it’s an attempt to recover credibility after the target change,” Daniel Chodos, a sovereign bond desk strategist at Credit Suisse, said by email. “Tomorrow the peso should appreciate and interest in Lebacs will surely return.”

Going Down

With the strait-jacket of a 10 percent inflation target for this year removed, Stoeppelwerth has said he expects the benchmark 7-day repo rate to fall to 23 percent by year end. That would come after a year in which the bank raised borrowing costs 400 basis points in a failed attempt to meet the previous inflation targets.
Inflation forecasts, already on the rise, are now set to increase further, said Mauro Roca, managing director for emerging markets at sovereign research at TCW Group. Expectations for year-end inflation have risen for eight straight months to 17.4 percent from 14 percent, according to a central bank survey that was carried out before the target change announcement.

“From a purely technical point of view, when expectations are diverging from the previous target as much as the new one, this doesn’t justify a rate cut,” Mauro Roca said by phone from Los Angeles. “The rate cut is a given, the only doubt is how quickly it will be done.”

--With assistance from Jorgelina do Rosario

To contact the reporter on this story: Charlie Devereux in Buenos Aires at cdevereux3@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Philip Sanders, Robert Jameson

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