[Prices] Positive surprise on inflation, standing at 2.3% (vs. 3.2% estimated and 3.7% in December). Suprise mostly concentrated on one-shot deflation in health and less so in domestic and cleaning services, were wages fell. For February, we maintain our expectation of 2.5% with a downward risk. Current week inflation was 0.4% WoW (vs. 0.2% WoW previous week). FX appreciation and regulated prices freezing seem to be doing the job.
[Monetary] In another risky expansionary move, after reporting CPI data, the Central bank cut once again the reference rate and thus accumulates 1900bp since the arrival of Pesce at the institution. Loans rates are at the lowest level in almost two years. However, loans to the private sector are not responding to this decrease, with activity still not catching up. Central Bank has abandoned the 6 month FX peg and has started a crawl of the official rate. However, the Real Effective Exchange rate appreciated slightly. The BCRA accumulates USD 367m of net sales during February and financing the Treasury. The monetary base increases 17.1% MoM mainly explained by Banks’ legal deposits. The seasonal private demand for money will decrease in the coming months.
Positive surprise on inflation in January, standing at 2.3% (vs. 3.2% estimated and 3.7% in December). We highlight the decrease in Health (-2.0%), which concentrates the difference compared with our estimates (0.5pp). There were also two methodological notes that describe a deflationary incidence in domestic service and cleaning managers by the effect of the extraordinary payment of wages in December. Thus, year-on-year inflation was 52.9%. For February, we expect a record of around 2.5%Monthly Inflation by items
- The main increases were reflected in Food and beverages (4.7%) and Alcoholic beverages and tobacco (4.3%), affected by the hike in Value Added Taxes. There were also significant increases in Restaurants and Hotels (4.2%), (in a seasonally high month), Other Goods and Services (3.1%) and Transport (1.5%).
- Current week inflation was 0.4% WoW (vs. 0.2% WoW previous week). Meanwhile, Core inflation accelerated to 0.5% (vs. 0.2% WoW previous week). As of February 14th, the general monthly inflation is 2.3% MoM and the core is 2.1% MoM.
4-weeks monthly inflation
After reporting the inflation data, the Central bank cut again the interest rate and thus accumulates BP1900 since the arrival of Pesce at the institution. The institution reduced by BP 400 bps to 44% its reference rate. The reduction is after the sharp reduction in the monthly inflation record of January to 2.3% from 3.7% in December, however, it was a register affected by extraordinary effects. The BCRA confirms an expansive monetary policy in the middle of debt negotiations.
Reference and deposit private market rate
Loans rates are at the lowest level in almost two years. At February 12th advance loans were at 44.3% (vs 51% a month ago and 63.5% three months ago), personal loans at 64% (vs 69% and 73.9%, respectively).
Private sector interest rate loans
However, loans to the private sector still do not respond to the decrease in interest rates. After remained almost flat in January, on February 10th, thirty days’ variation increase only 1.2% MoM. The only line with a significant increase is credit cards (5.4% MoM), the rest of the lines show almost no changes or decreases
.Monthly variation of loans to the private sector
Central Bank abandons fixed FX and starts depreciating it. After depreciating only 0.7% in January, up to February 13th the FX does it by 1.7% (or 62.3% at an annualized rate) in FX regime similar to a crawling peg with daily decreases around 0.2%.
Official FX rate
However, the Real Effective Exchange rate appreciated slightly. As a consequence of the global shock caused by the coronavirus the currencies around the globe have appreciated against the dollar. Since January-end the real depreciated 1.6%, the Chinese Yuan 0.6%, and the Euro did it by 2.2%. As a result, the REER appreciated 0.4% since the beginning of February.
Real Effective Exchange Rate
The BCRA accumulates USD 367m of net sales in February. On February 10th the Central Bank accumulates a net sale in the FX market of USD 367m compared with net purchases of USD 782m in the previous month or USD 1121m in December.
Net reserves decrease by USD 1.3bn during February. On February 11th net reserves stood at USD 11.2bn from USD 12.5bn at January-end, resulting in a net loss of USD 1.3bn compared with the USD 1.0bn loss of January.
Gross and Net Reserves
The BCRA continues to finance the Treasury. On February 10th the Central Bank transferred to the treasury ARS 20bn with advance loans. Since the arrival of Pesce at the institution accumulates ARS 180bn.
The monetary base increases 17.1% MoM mainly explained by Banks’ legal deposits. Reversing the observed in the previous month, Banks’ legal deposits increase by ARS 277bn in the last 30 days. This increase helped to reduce by ARS 255bn the BCRA’s bills and repo instruments.
Monetary Base expansion factors
The seasonal private demand for money will decrease in the coming months. The seasonal M2 private in March, April and May present significant decreases. This stress the strategy of the BCRA to finance the Treasury and reducing interest rate to impulse private credit in the middle of the process of restructuring where the demand for local assets, including the peso, is volatile. We believe is a risky move that puts upward risk FX depreciation.
Private M2 monthly seasonality