The Central Bank of Argentina (BCRA) will implement a new monetary policy scheme since next October 1st. This new scheme is aimed at lowering inflation and will contribute towards the restoration of a nominal anchor for the economy.
In particular, the BCRA undertakes not to raise the monetary base until June 2019. This target brings about a significant monetary contraction; while the monetary base has increased by over 2% monthly in the past few months, it will stop rising from now onwards. Additionally, some preliminary indicators forecast a high inflation rate for September, and even August’s foreign exchange pass-through to consumer prices will become evident in the coming months. Then, the monetary base will dramatically shrink in real terms in the following months. The BCRA has chosen the monetary base as it is the aggregate it holds a grip on. The commitment on the monetary target is thus reaffirmed. The monetary base targeting will be seasonally adjusted in December and June, when demand for money is higher. Should seasonal factors not be removed, there would be excessive monetary contraction.
The monetary target will be achieved by conducting daily transactions of Liquidity Bills (LELIQs) with banks. In addition, this target may be reached by adjusting minimum liquidity requirements. Meanwhile, the BCRA will continue sticking to the schedule to redeem LEBAC bills.
As the amount of money is exogenously determined, the interest rate on LELIQs is set by the supply and demand of liquidity, which will enable to move in the direction of zero nominal growth in the monetary base. Anyway, the BCRA undertakes to keep the minimum rate on LELIQs at 60% until inflation deceleration becomes evident. The rates determined in LELIQs auctions may involve periods or episodes of greater variability, but this variation would not necessarily entail a change in deposit and lending rates within the financial system.
The monetary target is supplemented with foreign exchange intervention and non-intervention measures. To start with, the BCRA would not intervene in the foreign exchange market when the exchange rate is between ARS34 and ARS44. This range will be adjusted daily at a 3% monthly interest rate until the end of the year, and will be readjusted at the beginning of next year.
The BCRA will allow free currency floating within this range as it considers it an adequate spectrum of parity. In case the exchange rate is above the non-intervention range, the BCRA will sell foreign currency for up to 150 million dollars daily. These sales will cause an additional contraction of the monetary base, which will tend towards correcting excessive depreciation.
On the contrary, if the exchange rate is below the non-intervention range, the BCRA will be able to purchase foreign currency. Only in the face of an increase in currency demand would the monetary authority decide to raise the monetary base backed by an upsurge in reserves.
The BCRA believes that this new scheme of non-intervention range adequately combines the advantages of free exchange rate floating with those of avoiding exchange rate excessive fluctuations in an economy with a shallow financial market in which parity plays an important role in defining inflation expectations.
Finally, the new monetary policy is consistent with primary balance fiscal targets for 2019 and a surplus target for 2020. As it has already been reported, the BCRA will no longer make transfers to the Treasury. This strengthens our commitment of achieving a decreasing inflation rate over time. The BCRA holds that the new monetary policy scheme for the months to come will allow inflation to get down, and price stability and predictability to recover, which has been so much longed for by Argentina.
September 26th, 2018