Monthly Monetary Report

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

Summary

• After the change of authorities, on December 10, 2015, the Central Bank prioritized among its objectives the achievement of price stability in the Argentine economy. In this sense, it began a path of monetary and exchange rate normalization, implementing a series of measures to achieve the unification of the foreign exchange market, the normalization of its open market operations and the recomposition of its balance sheet.

• The normalization of the foreign exchange market implied the establishment of a single exchange rate for all types of operations and the liberalization of the flow of current operations (only some restrictions remained for capital transactions and for external operations carried out prior to unification). The obligation to liquidate exports in the foreign exchange market was maintained and the purchase of foreign currency for the formation of foreign assets was freed up to US$2 million per month for individuals and legal entities. In addition, in order to generate a more solid position to exercise the managed floating policy in the foreign exchange market, it was agreed to partially convert the yuan corresponding to the currency swap agreed between the BCRA and the Central Bank of the People’s Republic of China.

• Since the unification of the exchange rate, the Central Bank has allowed the market to freely establish the parity at which foreign currency transactions were operated in the country, remaining outside the market operations. In this context, international reserves began to experience a renewed growing trend; there was also a change in the trend of private sector dollar deposits.

• Other initiatives implemented were the elimination of the limits that governed active and passive interest rates and the modification of open market operations. Changes were implemented in the bidding processes of LEBACs in pesos and dollars, the variety of available instruments was expanded, and LEBACs in pesos adjustable by exchange rate were relaunched.

• These measures had a correlation in the evolution of monetary aggregates, although seasonal factors prevailed when considering average monthly balances. The seasonal increase in the demand for transactional money in December meant that most of the monthly increase in private M3 is made up of the increase in means of payment, while term placements showed a more limited growth. However, the private sector’s time deposits in pesos, although they showed a downward trend until the exchange market was unified, showed a trajectory of sustained growth thereafter.

• The change in trend in term deposits took place in a context in which passive interest rates increased compared to what was observed until the first half of December. This increase was driven by the Central Bank, which in the December 15 auction increased LEBAC interest rates, between 4 p.p. for longer maturities and 8.5 p.p., for shorter ones. In subsequent auctions, after the normalization of the foreign exchange market, part of these increases were reversed.

• As indicated in the document that establishes the “Objectives and plans for the development of monetary, exchange, financial and credit policy for the year 2016”, the Central Bank intends to reduce the rate of expansion of the quantity of money significantly, and quickly, given that the high issuance rates of recent months are incompatible with the objectives set by this Institution for the coming years.

• The average monetary base registered a year-on-year growth rate of 40.5% in December. Although part of the acceleration in December was due to a higher integration of Minimum Cash than that observed in the same month of 2014 (within the framework of the quarterly reserve requirement period), even if this effect were excluded, the year would have ended with a significant acceleration. To reduce this dynamic, focusing on its priority objective, in the tenders held during the second half of December, the Central Bank absorbed almost $44,500 million. M3 ended 2015 with a year-on-year growth of 36.9%, which was 12.4 p.p. higher than that recorded in the same month of 2014.

• Loans in pesos to the private sector ended the year with a growth of around 39%, accumulating an increase of close to 19 p.p. in the last 12 months. In accordance with the objectives and plans regarding the development of the credit policy for 2016, the BCRA will seek to give greater solidity to the credit system, a channel through which productive development will be enhanced, and will seek to expand the supply of mortgage loans. In this direction, with the aim of giving access to credit to MSMEs at reasonable rates and for different terms, the “Financing Line for Production and Financial Inclusion” was established. In the first half of 2016, the entities covered by this rule must grant loans for investment projects until they reach a balance equivalent to 14% of their private sector deposits. At least 75% of the quota must be granted to MSMEs, at a maximum fixed interest rate of 22% n.a., with a minimum term of 36 months.