July 1, 2019. The Monetary Policy Council (COPOM) of the BCRA has decided to provide further information on the development of the monetary/exchange scheme for July.
In June, the BCRA met its monetary base (MB) target for the ninth consecutive month. The MB average amounted to ARS1,341.9 billion, standing slightly below the target of ARS1,343.2 billion.
There is high seasonal demand for cash in July as a result of the payment of the semi-annual complementary wage and winter holidays. Today, the BCRA decided to reduce the minimum reserve requirement for time deposits by 3 p.p. for a better management of liquidity conditions in this period and to help strengthen the transmission of the interest rate on liquidity bills (LELIQs) to the interest rate paid to depositors. Such a reduction accounts for around ARS45 billion. Once this seasonality is over, the monetary base target will shrink between August and October until the monetary effect is fully offset so as to avoid loosening the monetary policy. In other words, July’s monetary base target will stand at ARS1,343.2 billion and will start decreasing in August until reaching ARS1,298.2 billion in October.
The COPOM has decided to set a minimum rate for LELIQs at 58% in July in order to ensure that those changes do not entail the loosening of current monetary conditions. In other words, liquidity will be absorbed as required to prevent the benchmark interest rate from falling below that level. The fall in the minimum rate goes hand-in-hand with the drop in the inflation rate of the past few months which is expected to continue in July based on the Market Expectations Survey.
The COPOM upholds its decision to keep the limits of the foreign exchange benchmark zone at 39.755 and 51.448 ARS/USD until December 31, 2019. The foreign exchange intervention policy announced in April for the period April-June has been extended to July. This means that the BCRA will not make purchases in the forex market but may conduct sales to counteract episodes of excess volatility, both below and above the floor and ceiling of the benchmark zone.
The proceeds in pesos from the potential sale of foreign currency during July will be deducted from the monetary base target.
As already mentioned, the inflation rate began to decrease in April and May, and in light of high-frequency indicators this trend also continued in June. However, the inflation rate is still high. In addition, foreign exchange volatility has dropped dramatically since May.
The COPOM considers that tight controls on monetary aggregates imposed by the BCRA will continue leading the disinflation process for the coming months.
The measures described here have been adopted with the unanimous approval of all COPOM members. The COPOM is composed of Guido Sandleris, Governor; Gustavo Cañonero, Deputy Governor; Verónica Rappoport, Alternate Deputy Governor; Enrique Szewach, member of the Board appointed by the Board of this Central Bank; and Mauro Alessandro, Economic Research Deputy General Manager.