Monthly Monetary Report

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

• The price indices published during the month showed a generalized deceleration of inflation in June compared to May and core inflation records with mixed behaviors between the Metropolitan Area
of Buenos Aires and the interior of the country. In particular, according to the GBA CPI published by INDEC, used as a parameter by the Central Bank to assess compliance with its inflation targets while
a nationwide index is not available, monthly inflation decreased from 4.2% in May to 3.1% in June. Meanwhile, core inflation increased slightly, going from 2.7% in May to 3% in June.

• The BCRA’s Market Expectations Survey (REM) published at the beginning of August showed an increase of about 0.1 p.p. in inflation expectations for the fourth quarter. Thus, according to the REM, for the last months of 2016 the expected monthly inflation is 1.7%, which is above the monetary authority’s target for the period (1.5% or lower). However, all the sources of information followed by the
Central Bank showed that in July there would have been a significant decrease in monthly inflation compared to June’s records, which implies that the disinflation process is still ongoing.

• Considering all the factors mentioned, in July the Central Bank reduced its main reference interest rate – the one corresponding to the 35-day LEBAC – by 0.5 p.p. in the first auction of the month, bringing it to
30.25%, a level at which it decided to maintain it until the end of the month. Subsequently, in the first auction in August, it decided to reduce it by 0.25 p.p., to 30%. Interest rates on passes were reduced by the same magnitude and at
the end of July those of passive and active 1-day pass operations stood at 26%-35% and those corresponding to 7-day passes at 27%-36%, respectively. At the beginning of August, these interest rates also decreased by 0.25 p.p. The BCRA will continue to proceed cautiously, in order to consolidate a disinflation trajectory compatible with its monthly inflation target of 1.5% or lower for the last quarter of this year.

• In the money market, shorter-term interest rates – mainly those traded in the interfinancial markets and those applied to loans granted through advances of up to 7 days – exhibited heterogeneous trajectories, although they averaged lower values than last month and remained within the interest rate corridor established by the Central Bank in the transfer market. On the other hand, passive interest rates maintained a downward trend over the course of the month, in a period in which financial institutions continued to maintain comfortable levels of liquidity.

• The monthly increase in the monetary base was driven by the seasonal increase in the working capital held by the public – associated with the collection of the half complementary annual salary and winter vacations – and the entry into force of the
increase in reserve ratios announced in May. The Central Bank’s purchases of foreign currency, both from the private and public sectors, were once again the main source of monetary creation that
made it possible to supply the greater demand for primary money. Part of the expansion associated with these operations was sterilized mainly through the placement of LEBACs. Meanwhile, broader
monetary aggregates continued to decelerate in year-on-year terms.

• As had happened in June, the increase in deposits in pesos allowed financial institutions to integrate the higher reserve requirements and also increase their liquidity maintained in LEBAC. Thus, the broad liquidity ratio
in local currency (sum of cash in banks, the current account of the entities in the Central Bank, the net passes with this entity and the holding of LEBAC, as a percentage of deposits in pesos) increased 2.1 p.p. compared to the previous month, reaching 42.3%.

• Following the improvement in the Central Bank’s balance sheet in recent months, at the end of July the Central Bank canceled early the US$5 billion in passive pass operations that it had arranged towards the end of January of this year, and agreed to new operations with two international banks for US$1 billion. In addition to the reduction of its passive passes by US$4,000 million, it achieved a substantially lower interest rate (US$ 1-month LIBOR + 2.25%).