Monthly Monetary Report

Monthly report on the evolution of the monetary base, international reserves and foreign exchange market.

Summary

• In April, the Central Bank of the Argentine Republic (BCRA) presented its Monetary Policy Plan for 2016. It detailed the objectives and actions that this Institution plans to
carry out in the area of monetary and exchange rate policy, with the priority goal of inducing a systematic and sustainable reduction in the inflation rate, until it is reached, within a reasonable time, at 5% per year. The fulfillment of this objective will be the greatest contribution that this Institution can make to guarantee financial stability, employment and, fundamentally, economic development with social equity.

• To achieve these objectives, the path towards the formal implementation of an Inflation Targeting Regime will be followed throughout the year, in line with the existing institutional scheme in most countries that enjoy remarkable price stability.

• The pillars of the new monetary policy scheme are the use of the interest rate as the main instrument of monetary policy, the floating of the exchange rate, and transparent and regular communication of monetary policy decisions.
• The BCRA has established the 35-day LEBAC rate as a reference, along with a corridor of active and passive pass rates consistent with it. The interest rate is the primary indicator of monetary policy bias. In this scheme, the quantity of money is endogenous, since any monetary expansion that is not validated by greater demand is automatically absorbed via BCRA securities or passes.

• Within the framework of the announced monetary policy, the value of the peso in terms of the currencies of other countries is determined by the market. The BCRA will occasionally operate in the Single and Free Exchange Market to
avoid unjustified fluctuations in the value of the peso or to manage the profile of its balance sheet. This scheme aims to dissociate the behavior of exchange rate variables from the evolution of domestic prices. At the same time, it seeks to preserve relevant degrees of flexibility to face adverse shocks of different kinds on the local economy.

• The BCRA’s schedule of periodic publications for the remainder of the year was also presented, referring to the communication of its actions in the area of monetary policy.

• During the first week of May, this Institution decided to reduce the 35-day LEBAC cut-off rate to 37.5% (from the 38% in force throughout April), while leaving the active and passive pass rate corridor unchanged, with respect to the levels of the previous month. The reduction in the nominal rate is intended to limit the increase in the contractionary bias of monetary policy. In fact, although inflation in the month of April in the City of Buenos Aires would have been high due to the incidence of the prices of public services, the various official and private sources that the BCRA analyzes weekly have been showing a drop in core inflation in April compared to March. This reduction has therefore implied an increase in the expected real interest rate.

• In any case, the BCRA considers that the situation still merits prudence. Despite the observed decline in core inflation, during the month of May there will be some occasional price movements (e.g., fuels) that, although they should not alter the underlying inflationary trend, could have an impact on the general inflation rate. The joint analysis of the aforementioned factors induces the BCRA to maintain the current contractionary bias of its monetary policy.

• With regard to shorter-term interest rates – mainly those operated in the interfinancial markets and those applied to loans granted through advances of up to 7 days – during the month of April they outlined trajectories that remained within the interest rate corridor established by the BCRA.

• As a result of the monetary operations carried out by the BCRA throughout the month, there was a net absorption, mainly through the placement of LEBACs. Thus, the monetary base decreased 0.8% in April compared to March and reduced its year-on-year growth rate to 27.1%, 2.4 p.p. below that observed in the previous month. Broader monetary aggregates also continued to slow their growth rates. While M3 reduced its year-on-year variation by 3.2 p.p. to 25.8%, Private M2 slowed its rate of increase by 2.1 p.p. to 25.5% YoY.

• International reserves ended April at US$34,380 million, increasing by US$4,808 million throughout the month. The increase was mainly explained by the increase in foreign currency deposits of the National Treasury in the BCRA, within the framework of the debt placement carried out in the middle of the month.