The BCRA has been implementing a new monetary policy scheme since October 1, 2018. This new scheme is aimed at lowering inflation and contributing towards the restoration of a nominal anchor for the economy.
The BCRA is committed to keeping zero growth in the monetary base (monetary aggregate that the BCRA mostly monitors) against the monthly average prior to the implementation of the new scheme.
The monetary target is achieved by conducting daily transactions of Liquidity Bills (LELIQs) with banks. As the amount of money is exogenously determined, the interest rate on LELIQs is set by the supply and demand of liquidity, which enables to move in the direction of zero nominal growth in the monetary base.
On March 14, 2019, the BCRA decided to extend the 0% growth of the MB target until December 2019 (net of foreign currency purchases) when the monetary base will be seasonally adjusted (excluding June’s seasonal adjustment). For that purpose, the MB cumulative average of February 2019 was considered (ARS1,343 billion), when the overcompliance of the target was recorded.
The monetary target is supplemented with foreign exchange intervention and non-intervention measures. At first, the non-intervention range was set between ARS34 and ARS44, and adjusted on a daily basis at a 3% monthly rate until the end of 2018, a 2% monthly rate between January and March 2019, and a 1.75% rate from the beginning of April up to the sixteenth of said month. After this date, and with the aim of reinforcing the process of future disinflation, the Monetary Policy Council (COPOM) of the BCRA has decided to reduce the rate of adjustment of the non-intervention range to 0% for the rest of the year. That is, the floor and ceiling of the range will remain constant at ARS39.755 and ARS51.448, respectively, until December 31, 2019.
In addition, if the exchange rate stood below the non-intervention range, the BCRA would not purchase dollars until next June 30. This way, the BCRA gives priority to its disinflationary objective. Moreover, it will not expand the monetary base even when the behavior of the foreign exchange market suggests a rise in pesos demand.
If the exchange rate climbs above the non-intervention range, the BCRA will sell foreign currency for up to 150 million dollars daily, as established in the monetary scheme, and the monetary base target will be adjusted downwards as a result of such sales.
The BCRA believes that this new scheme of intervention and non-intervention ranges adequately combines the advantages of free exchange rate floating with those of avoiding excessive exchange rate fluctuations in an economy with a shallow financial market in which the exchange rate plays an important role in defining inflation expectations.
Finally, the new monetary policy is consistent with the targets of primary fiscal balance for 2019 and of surplus 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.
This quarterly publication analyzes the national and international economic context, assesses inflation dynamics and its outlook, and openly explains the rationale behind monetary policy decisions.