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Monetary Policy to Narrow the Effects of Health Emergency

The monetary policy adopted by the BCRA helped to soften the impact of the COVID-19 health crisis on the economic activity through a number of measures aimed at protecting households’ savings in pesos, and several instruments that streamlined the access to credit and reduced the cost of financing to soothe the financial needs of companies and families as well. This is one of the main conclusions arrived at in the Monetary Policy Report for the first months of 2020.

The COVID-19 pandemic struck the country amid an economic and social emergency triggered by the adverse effects of the 2018-2019 balance of payments and debt crisis that brought about a more-than-two-year recession and historic inflation rates since the beginning of the 1990s.

The epidemiologic nature of COVID-19 and the subsequent approach to the health crisis allow to spotlight three phases within this economic cycle: the first one marked by strong offer restrictions and the resulting contraction of demand; the second one, by a progressive relaxation; and the third one, by efforts to return to a “new routine”. During the first phase, the National Government strove for the best solution to avoid an income disruption in households, to give assistance to companies to safeguard employment, and to ensure the normal running of essential services and the strengthening of public expenditure on health.

The BCRA played a fundamental role to ameliorate the effects of the crisis by adjusting the financial system to the measure of compulsory isolation; soothing the financial situation of companies and families; protecting households’ savings in pesos; and offering credit facilities to the productive sector.

As regards the measures oriented towards depositors’ safeguard, the BCRA ensured a minimum positive interest rate in real terms for traditional time deposits, 70% of the LELIQ interest rate (30.1% in annual effective terms), and for early-payment UVA time deposits.

The measures for financial relief implemented by the BCRA made the financial system achieve a record level of lending, judging by the amounts and the speed at which credits were granted. By the closing of this report, the total of credits approved and in the process of approval for micro-, small-, and medium-sized enterprises (MSMEs) and health services providers was ARS 223.28 billion. Disbursements for ARS 183.87 billion were channeled to 113,618 companies. In addition, 151,443 self-employed workers whether or not under a simplified tax scheme obtained 0% credit lines for an amount of ARS 19.89 billion in only 15 days from the date the line was launched.

The BCRA supplied the necessary resources to finance the fiscal measures adopted by the Federal Government, without drawing on international credit amid a foreign debt restructuring process. The capital controls in effect made it possible to reduce foreign exchange volatility, avoiding greater inflationary pressure and contributing to preserving financial stability.

The managed floating exchange rate system furthered by the BCRA along with the Government’s decision to postpone raises in utility rates helped to reduce inflation. Likewise, the establishment of maximum prices in essential consumer goods, the agreement on drug prices and the Preserved Prices program contributed to achieving a lower inflation rate in April, which is expected to remain low in the coming months.

The monetary policy will demand significant liquidity expansion during the health emergency. Once the pandemic is over, the BCRA will make any necessary adjustments to liquidity levels in order to sustain recovery and make liquidity return to standard levels. In this regard, it is worth pointing out that an increase in the demand for money as a result of economic recovery will help to absorb an important portion of the resources poured into the market.

Indeed, the monetization of the Argentine economy was at historically low levels at the beginning of the crisis. However, it is important to bear in mind that the BCRA has a wide range of tools available to sterilize any excess liquidity that may arise during the normalization process.

In parallel, the commitment undertaken by the BCRA together with the Argentine Ministry of Economy to develop a strong debt market in domestic currency will help to channel excess liquidity towards latent financing needs in our economy.

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May 19, 2020.

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