Buenos Aires, June 12th, 2018. On June 7, the BCRA disclosed the main guidelines of the fiscal and monetary policy schedule in line with the agreement reached with the International Monetary Fund (IMF) to obtain significant liquidity facilities that may allow to mitigate Argentina’s financial risk in the coming years.
The BCRA confirms that it will continue following an inflation targeting monetary policy—with the interest rate as an instrument—and holding a floating exchange rate, with exceptional interventions in the face of disruptive forces.
Last months’ changes in the international arena sharply affected Argentina since it is still in a fiscal transition process. In addition, these changes triggered peso depreciation, which prevents the compliance with the current inflation target. This requires redefining the inflation targets for the years to come, which are set at 17% for 2019, 13% for 2020, and 9% for 2021. Against the backdrop of the new scenario, the BCRA considers that these are the targets to meet, which compels it to adopt tough measures in terms of monetary policy. These new targets are expected to be reached in light of the new monetary policy scheme characterized by the removal of transfers to the Treasury, the repurchase of non-transferable bills by the Treasury (with the subsequent reduction of BCRA's stock of remunerated liabilities), and the Executive Power’s commitment to submit a bill to the National Congress in order to make changes to the BCRA Charter, which would endow the BCRA with more independence 1.
In this new scheme, the BCRA will be led by a year-on-year inflation rate at the end of each quarter in line with the inflation targets set for the coming years as mentioned above. In the second quarter of 2019, when the first twelve-month term of the new scheme ends, the BCRA will endeavor to drive the inflation rate below 22%, in line with the results of the Market Expectations Survey (REM).
Inflation rate in May was lower than the private sector's expectations, which is mainly owing to a lower impact of regulated prices. High-frequency indicators on inflation have evidenced acceleration in June. In addition, for 2018 the REM showed an increase from 22% to 27.1% in general inflation, and from 19.8% to 25.1% in core inflation, with significant rises in inflation expectations on both a year-on-year, and yearly (2019) basis. This scenario calls for an effective response. In this sense, the BCRA is committed to keep a contractive bias of monetary policy until a decrease of both inflation and inflation expectations becomes palpable.
For this reason, the BCRA has decided to keep the monetary policy interest rate at 40%. As part of the process to give a turn to the monetary policy, the BCRA has decided to reduce the width of the seven-day repo corridor from 1,400 to 600 b.p., and the overnight rate from 2,900 to 1,000 b.p. Thus, seven-day interest rates have been set at 43% and 37% for repo and reverse repo transactions, respectively, while overnight interest rates have been set at 45% and 35% for repo and reverse repo transactions, respectively.
|% m.||% y.o.y.||% m.||% y.o.y.||% m.||% y.o.y.||% m.||% y.o.y.||% m.||% y.o.y.||% m.||% y.o.y.|
|Core National CPI||1.7||21.1||1.5||21.1||2.1||21.6||2.6||22.4||2.1||22.4||n/a||n/a|
|CPI for Greater Buenos Aires||3.4||25.0||1.6||25.4||2.6||25.5||2.5||25.6||2.6||25.6||n/a||n/a|
|Core CPI for Greater Buenos Aires||2.0||21.8||1.5||21.9||2.2||22.3||2.5||23.1||2.1||22.8||n/a||n/a|
|CPI for the City of Buenos Aires||3.3||26.1||1.6||25.8||2.6||26.3||2.1||25.4||3.0||26.5||n/a||n/a|
|Core CPI for the City of Buenos Aires||1.6||23.5||1.7||23.1||2.1||23.7||2.4||23.2||1.9||23.5||n/a||n/a|
|CPI for San Luis||3.0||24.3||1.4||24.6||2.5||25.6||2.8||25.2||2.5||25.3||n/a||n/a|
|CPI for Córdoba||3.1||25.5||2.3||26.6||2.5||26.8||1.7||24.8||3.1||25.8||n/a||n/a|
|Core CPI for Córdoba||1.4||20.4||1.6||20.3||2.0||21.2||2.2||20.8||2.4||21.5||n/a||n/a|
|Domestic Wholesale Price Index (IPIM)||1.6||18.8||4.6||22.4||4.8||26.3||1.9||27.5||1.8||29.2||n/a||n/a|
|Domestic Basic Wholesale Price Index (IPIB)||1.7||18.2||4.9||22.0||5.2||26.7||2.4||28.9||1.9||31.1||n/a||n/a|
|Producer Basic Price Index (IPP)||1.8||17.9||5.0||21.7||5.6||27.1||2.4||29.9||2.0||32.4||n/a||n/a|
|Construction Cost Index (ICC)||1.5||26.4||1.1||24.5||2.3||25.3||1.6||25.9||4.9||25.1||n/a||n/a|
|Construction Cost Index (ICC) - Materials||1.6||21.9||2.4||22.6||2.8||24.0||2.5||24.7||1.7||25.5||n/a||n/a|
|Construction Cost Index (ICC) - Labor||0.2||26.2||0.2||22.3||1.7||24.2||1.1||25.6||7.3||24.0||n/a||n/a|
|National CPI Market Expectations Survey (REM) - 2018||17.4||19.4||19.9||20.3||22.0||27.1|
|National Core CPI Market Expectations Survey (REM) - 2018||14.9||16.9||17.1||18.1||19.8||25.1|
|National CPI Market Expectations Survey (REM) - 2019||11.6||13.5||14.0||14.3||15.0||19.0|
|National Core CPI Market Expectations Survey (REM) - 2019||10.0||12.0||12.6||12.6||13.2||17.8|
|National CPI Market Expectations Survey (REM) - 12 months||17.4||18.6||17.6||17.8||18.2||22.2|
|National Core CPI Market Expectations Survey (REM) - 12 months||14.9||16.5||16.1||16.0||16.1||20.7|
1 For a more detailed explanation on this schedule, you can consult Strengthening of Inflation Targeting.