Argentina’s Inflation Woes Grow
Inflation and activity surprises in emerging markets hold central banks firmly in the spotlight.
Argentina’s June inflation looked predictably scary. Headline inflation surged to 29.5% year-on-year on the back of the currency’s sell-off, getting uncomfortably close to the upper bound of the International Monetary Fund’s 32% target. Core inflation hit 26.9%. With more inflation pressures in the pipeline, there is no room for the central bank to ease its policy stance any time soon. A silver lining is that the 40% benchmark rate (equivalent to the 8.1% real rate) should have a cooling effect on domestic activity, reducing inflation risks down the road.
A downside inflation surprise in South Africa is unlikely to alter the central bank’s cautious policy stance. Headline inflation rose by less than expected to 4.6% year-on-year and core inflation eased to 4.2% in June – mostly due to lower services/rental prices (see chart below). The numbers send a strong signal that domestic demand pressures remain contained. Still, several factors (including a weaker exchange rate) are likely to push headline inflation higher in the second half of the year. Together with the expected U.S. Federal Reserve interest rate hikes, this should keep the central bank on its toes. The market currently prices in 18bps of tightening in the next six months, which does not look too aggressive to us.
The latest batch of Poland’s activity data puts the central bank’s ultra-dovish policy stance back in the spotlight. The economy continues to look very resilient despite signs of weakness in the Eurozone, with industrial production expanding by 6.8% and construction output by 24.7% year-on-year in June. The strength of domestic activity and the labor market’s tightness reinforce expectations that core inflation will rebound in the second half of the year, questioning the central bank’s intention to stay on hold into 2020. Two full hikes are now firmly in the price for the next two years.
Chart at a Glance
Source: Bloomberg LP
RSS Import: Original Source