Monthly Monetary Report

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

At the meeting scheduled for August 7, the Monetary Policy Committee (COPOM) of the Central Bank of the Argentine Republic (BCRA) resolved to define the 7-day Liquidity Bills (LELIQ) rate as the new monetary policy rate and set it at 40%. Then, in response to the volatility observed in the foreign exchange market and the risk it implies in terms of a greater impact on local inflation, the BCRA’s COPOM decided to meet outside its pre-established schedule on two other occasions, on August 13 and 30. On these occasions it increased the monetary policy rate first to 45% and later to 60%.

Interest rates in the inter-financial lending markets were aligned with the new value of the monetary policy rate at the end of the month: the interest rate on 1-business-day call operations ended August at 57.25%, while the interest rate on current account advances of more than $10 million and up to 7 days to companies ended August at 61.7%. Passive rates also showed increases after the last increase in the monetary policy rate: the TM20 of private banks ended the month at 40.5% and the BADLAR of private banks at 39.4%; in both cases more than 4 p.p. above the levels they averaged in the first 30 days of August.

As announced, the plan to gradually reduce the stock of LEBAC began to be implemented in August. To this end, a series of measures were arranged: in the LEBAC auction, the BCRA began to offer an amount lower than the maturity, which can only be subscribed by buyers who are not financial institutions; they can only buy LEBACs on the primary market on behalf of third parties and cannot sell their remaining holdings to counterparties other than banks on the secondary market; financial institutions are offered BCRA Notes (NOBAC) and LELIQ as options to place their liquidity. In turn, as an alternative investment in pesos, the Ministry of Finance began to tender bills in pesos on the maturity dates of LEBAC. The proceeds are deposited by the Treasury in public banks, which in turn transfer it to the BCRA to integrate reserve requirements and acquire LELIQ.

Thus, after the maturity of LEBAC, it was observed that part of the funds not renewed by holders who are not financial institutions began to swell deposits, both in the public sector, due to the placement of LETES, and in the private sector. As a result, the private sector’s time deposits in pesos grew in both nominal and real terms and the private M3 accumulated a nominal growth of 25.6% in the last 12 months. However, private M2 continued to decelerate, reaching a nominal year-on-year growth of 20%, mainly due to the evolution of working capital held by the public.

As of August 16, a 3 p.p. increase in reserve requirements in pesos was ordered for financial institutions with greater assets. This increase must be integrated through higher balances in current accounts. Thus, part of the decrease in LEBAC and the growth in deposits in pesos of financial institutions had as a counterpart the increase in current accounts in pesos at the BCRA. At the end of August, another increase in the reserve requirements in pesos for the same group of financial institutions was defined, of 5 p.p., which is effective as of September and can be integrated indistinctly with current account balances in the BCRA, NOBAC or LELIQ.

In the local currency segment, loans fell 0.8% in August when considering balances in real and seasonally adjusted terms, with falls in most credit lines. Real year-on-year growth stood at 10.9%. In nominal terms, they grew 0.8%, underpinned by lines related to consumption – personal and cards – and mortgages.

Due to the fact that the growth of deposits far exceeded that of loans, in August bank liquidity in pesos increased by 2 p.p. to 45.7% of deposits. In turn, the measures implemented with regard to the allocation of LEBAC and reserve requirements caused its composition to change, in favor of the mandatory components – mainly current accounts – and to the detriment of the securities issued by the BCRA – with LEBAC replaced by LELIQ.