Buenos Aires, May 8, 2018. During the last few weeks, international conditions along with some domestic factors generated an unstable situation in the foreign exchange market. In the face of this type of episodes, central banks have a series of options which include favoring exchange rate appreciation, implementing exchange rate interventions to avoid its overreaction, and increasing the interest rate to moderate the inflationary impact.
The BCRA’s initial decision was to appeal to foreign exchange interventions to restrain the peso depreciation in order to ensure the success of the disinflation process. As days went by—with the certainty that observed changes reflected a deeper shock over emerging markets and not an isolated volatility episode in financial markets—the BCRA progressively moved away from intervention and allowed for exchange rate floating.
At the same time, the BCRA increased the monetary policy interest rate by 1,275 basis points to reach 40% on May 4, with the aim of preserving the disinflation process. The seven-day repo corridor was expanded and the repo and reverse repo transactions stood at 47% and 33%, respectively. The objective of the corridor’s unusual expansion was to allow the yield of domestic assets to move more freely in order to face high-frequency shocks.
To ensure the transfer of the monetary policy interest rate to the rest of the rates, the monetary authority traded its bills on the secondary market.
Given this out-of-the-ordinary situation and the use of unusual tools, the BCRA considers it appropriate to share its views on the near future and on its policy management.
1. The BCRA confirms its monetary regime based on the use of the interest rate as a tool within a floating exchange rate scheme which allows for shocks absorptions (in particular, from external sources), with exceptional interventions in the exchange rate market in the case of disruptive dynamics that may alter the disinflation process.
2. Inasmuch as the market instability is moderated, the BCRA will restore its transactional scheme, going back to a narrower repo corridor that allows for the automatic transfer of monetary policy interest rates to the rest of the interest rates.
3. Given inflation is above the expectations for 2018 and the fact that emerging markets face a higher instability scenario, the BCRA considers that the real interest rate should be, for the near future, significantly higher than that observed before the last changes.
High frequency indicators show an improvement in the development of underlying inflation in May in addition to a slowdown in the regulated component. On the other hand, the Market Expectations Survey showed an increase from 20.3% to 22% in general inflation, and from 18.1% to 19.8% in core inflation. Even though the effect on domestic prices—caused by the peso depreciation against the US dollar—cannot be discarded, it must be taken into account that many of Argentina’s business partners have also depreciated their currencies against the US dollar, which has mitigated the impact.
Based on all the information mentioned above, the BCRA has decided to keep the monetary policy interest rate at 40%. Regarding the repo corridor, seven-day interest rates stand at 47% and 33% for repo and reverse repo transactions, respectively, while overnight interest rates stand at 57% and 28% for repo and reverse repo transactions, respectively.
The BCRA will conduct its monetary policy to reach its intermediate inflation target of 15% in 2018.