Ideas de Peso | Foreign Exchange Interventions and the BCRA’s Balance Sheet

We invite you to read the new article on Ideas de Peso, a blog where economists working at the BCRA share their opinions:

Within the framework of the inflation targeting scheme adopted to achieve a sustainable, low inflation rate over time, the BCRA announces its inflation target rate and resorts to the short-term interest rate as a tool to be used accordingly. Then, if the monetary base expands or shrinks for a reason other than a change in the demand for money, the BCRA will either sterilize or inject liquidity, especially by way of repos or liquidity bills (LELIQs) (in addition to open market transactions and LEBAC bill auctions). It is worth pointing out that the interest rate is not set at a specific value. Rather, an interest rate corridor is implemented. Therefore, it may fluctuate within this corridor without triggering any sterilization operations, which will only be conducted if the market rate approaches the corridor’s floor or ceiling.

When the BCRA purchases international reserves, the monetary base increases. If such an expansion is not demanded by an economic agent, surplus liquidity pushes down the market interest rate. Should this happen when the interest rate is on the floor of the corridor, the BCRA automatically sterilizes this surplus by way of repos or LELIQs. Therefore, international reserves increase, and so do non-monetary liabilities. This is the trend observed since mid-2016. From that time, about 31 billion dollars have been accumulated and the stock of bills and net repos in terms of GDP has risen from 8.5% to 12.3%. Chart 1 shows the movement of both items in the BCRA’s balance sheet.

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April 26th, 2018