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    A Prospect of Disinflation in Argentina

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    May 16, 2019

    Argentina’s first downside inflation surprise in months boosted local assets. Monetary authorities in many emerging markets remain in a dovish mode, echoing rate expectations for major central banks.

    Argentine assets rallied following the first downside inflation surprise in months
    . Monthly inflation undershot consensus in April, decelerating to 3.4% from 4.7% in March. Even though yearly inflation reached another cyclical high (a dizzying 55.1%), it is likely to start topping out in May-June—hopefully pushing interest rates lower and (maybe) generating a positive feedback loop for domestic activity. Unanchored expectations, adjustments to regulated prices, wage indexation, and another bout of the currency’s weakness remain the key risks going forward (see chart below).  

    Monetary authorities in many emerging markets remain under a dovish spell. Indonesia’s central bank maintained an accommodative policy guidance at its meeting today. The Philippines just announced a larger than expected 200bps cut in the reserve requirement ratio1(delivered in three stages)—in addition to last week’s policy rate cut. An easier policy stance in the Philippines seems justified against the backdrop of steady disinflation. In Poland, however, prices re-accelerated in the past few months (yearly core inflation jumped from 1.4% to 1.7% in April). But this did not stop the central bank’s governor from saying that he will ignore the latest upside surprise and that the policy rate is likely to remain unchanged during his term. The market remains equally sanguine, pricing in no rate hikes in Poland over the next 12 months.

    Several downside inflation surprises in Turkey notwithstanding, longer-term price expectations remain unanchored, grinding higher to 15.48% in May—in part reflecting the renewed pressure on the currency. The central bank relied heavily on currency interventions to minimize these pressures—but at the expense of its international reserves. The latest estimates point to further decline, with the officially reported net reserves falling to levels last seen in 2005 and the net reserves excluding currency swaps to levels last seen in 2002 (!). Both developments argue in favor of higher local rates, but political pressures may limit the central bank’s policy response.

    Chart at a Glance

    Argentina Inflation and Exchange Rate

    Source: VanEck; Bloomberg LP

    1The reserve requirement ratio is a central bank regulation, employed by most of the world's central banks, that sets the minimum amount of reserves that must be held by a commercial bank.


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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