Yesterday, the central bank (BCRA) cut its key policy rate again, by 75bps to 27.25% from 28%. The move was unexpected by markets. It is the second straight cut since the government relaxed inflation targets for 2018 (15%, up from 8-12%), 2019 (10%, up from 5%) and 2020 (5%). As a key argument for the cut, the BCRA noted greater “contractionary bias in monetary policy, ... with a real interest rate much higher than at the beginning of 2017.” Indeed, the Bank shows a real interest rate of 10.5% in early 2018 against 3.9% in early 2017. Yet, it mentioned that high-frequency data was “mixed” as inflation ended 2017 at a high 25%. Further, despite a higher real interest rate, credit data already shows a trend reversal. Total credit growth accelerated to +51% y/y in December 2017 from +31% in December 2016, mostly driven by a rapid recovery of credit to NFCs. The BCRA will need to reaffirm its commitment to tame inflation in order to maintain its credibility on the markets.
