The authorities of the Central Bank of the Argentine Republic (BCRA) have been observing that the government’s firm commitment to the zero fiscal deficit target increases credibility in the central anchor of the economic program and strengthens a path of lower inflation expectations. The sustained confirmation of this commitment has made it easier for the BCRA to contract in real terms those factors that in previous years fueled growing monetary imbalances and drove inflationary instability.
This fundamental background is what allows the BCRA to commit to reducing monetary financing of the Treasury deficit to zero and thus advance as quickly as possible in the recovery of its balance sheet. This process is critical to strengthen the independence of monetary programming and reduce its uncertainty towards the future. The remuneration of its financial liabilities is another factor that, being under the control of the BCRA, has also contributed in past years to macroeconomic imbalances.
The BCRA’s responsibility to limit the creation of endogenous money is managed through the monetary policy interest rate, constituting a complementary anchor to maintain inflation expectations on a downward path. Today, bank credit to the private sector in Argentina is at historical minimum levels. It should be noted that, unlike economies where a decrease in the interest rate expands the secondary sources of money creation through bank credit, in Argentina the contractionary effect on the primary expansion of money predominates. It is for this reason, and with the aim of continuing to reduce the primary creation of money and deepen the disinflation process, that the BCRA decided to reduce the interest rate on one-day passive reverse repos to 40% nominal annual rate.
In order to achieve compliance with its mandate of price stability, the BCRA must restore the normal functioning of the set of monetary policy instruments granted by its organic charter. In recent months, through the normalization of banking regulations, financial subsidies that resulted in monetary expansion outside the direct control of the BCRA have been eliminated.
On this occasion, the BCRA resumes its discretion to intervene in the secondary market for securities, so far limited by predetermined prices in the regulations (2% spread). In this way, in accordance with the provisions of article 4 of its Organic Charter, the BCRA will contribute to the proper functioning of the capital market and regulate the amount of money.
The determination taken by the Board of Directors of the BCRA today is consistent with the announcement of an orderly program of bi-weekly Treasury auctions. The program aims to build a curve of short-term liquidity reference rates of the Treasury, providing certainty regarding the availability of investment alternatives to capital market participants.
