(MENAFN- Investors Ideas) August 16, 2017 (Investorideas.com Newswire) Just like in the previous two months, 2017-end inflation expectations slid after the lower than projected CPI print in Jul-17 (-0.05% vs consensus at 0.12%), although longer term expectations remained anchored again between 3.4% and 3.6%. Specifically, Dec-17 expectations fell by 12bp to 4.16%, while 12-month and 2-year ahead expectations stood at 3.62% (+2bp), and 3.42% (+4bp), respectively. We expect headline inflation to accelerate from Aug-17 onwards given an unfavorable statistical base so it would stand again above the ceiling of BanRep's target range. Recall that in Jul-17 annual inflation reached 3.40%, within such range for the second straight month (Jun-15: 3.99%), while we recently cut our year-end forecast from 4.3% to 4.1%, following three consecutive downward surprises.
As we mentioned last month, we believe that the market consensus is waiting to assess the magnitude of the expected inflation's uptick in 2H17 before making further downward revisions in the long-term forecasts. This explain the recent stickiness of 12-month and 2-year ahead expectations, in our view. We still see headline inflation closing 2018 at 2.9% amidst the reversion of the effect from the increase in taxes this year, a wider output gap, and a relatively stable FX. Also, prices along 2018 are projected to be indexed to an observed inflation and a minimum wage increase well below those of the previous years.
Moreover, 12-month and 2-year ahead non-food inflation expectations decreased sharply, falling 11bp (to 3.52%) and 15bp (to 3.26%), respectively. This, given that the strong drop of headline inflation in Jul-17 was explained by downward pressures from both foodstuffs and core measures, with the latter mainly led by the correction of some utilities' tariffs. While long-term non-food inflation expectations get closer to the 3% target, we expect this trend to continue ahead as we forecast core inflation measures to keep falling at a relatively fast pace in the coming months.
Expectations for the monetary policy path were not modified. According to the survey, analysts still see the repo rate at 5.25% by year-end, and at 4.50% by Jul-18. We also maintained our long-held view of the reference rate at 5.25% by Dec-17, while we recently modified our forecast for Dec-18 from 4.75% to 4.50%, with the balance of risks tilted to the downside in both cases.
There seems to be a broad consensus regarding a 25bp cut this month. Overall, the significant room provided by the recent dynamics of inflation and the widespread weakness of economic activity supports the call for a 25bp cut in Aug-17, despite the slight positive surprise to the consensus from the 2Q17 GDP growth (1.3% y/y vs. 1.2% expected; Credicorp: 1.4%). Afterwards, the BanRep would pause the easing cycle as it will prefer to assess the extent of the anticipated rebound of inflation from Aug-17 onwards. Once the temporary factors that have affected inflation start to fade in 1Q18, we expect the BanRep to resume the easing cycle (to 4.5%, as mentioned above).
Finally, as for Aug-17 monthly inflation, we expect the CPI to advance 0.22% m/m, way above consensus (0.10%). The main reason behind this divergence is that we are assuming a 0.25% m/m food figure vs. the -0.02% of the market. We see this relatively strong rebound from foodstuffs (Jul-17: -0.21%; Jul-17: -0.06%) given the recent non-negligible upward trend of some prices we monitor in wholesales centers. Also, we considered the COP 141 increase in gasoline prices (~+1.7%).
Daniel Velandia, CFA
+ (571) 3394400 Ext. 1505
Camilo Durán
+ (571) 3394400 Ext. 1383
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