Monthly Monetary Report

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

Summary

After confirming the acceleration of inflation in June, the Monetary Policy Council considered that it was necessary to maintain the contractionary bias of monetary policy until the trajectory of inflation and expected inflation are aligned with the December 2019 target. This incorporates the presence of risks of a higher than expected pass-through of the exchange rate to prices. Consequently, in July it ordered that the monetary policy rate remain at 40%.

In July, modifications were also announced in the framework of monetary policy: the incorporation of a more careful monitoring of monetary aggregates to the inflation targeting scheme; the gradual decrease in the stock of LEBAC; the consolidation of the Monetary Policy Council, transforming it from an advisory body to a decision-making body and; the reduction in the frequency with which the monetary policy decision is made, which is monthly starting in August.

The Central Bank continued to operate in the secondary LEBAC market to reinforce the monetary policy signal. The 35-day LEBAC interest rate stood at 45.5% at the end of the month, 239 bps above its level at the end of June.

Passive interest rates continued with the upward trend that they began to show in mid-June, following the trajectory of LEBAC rates, until the third week of July. In the last month and a half, they accumulated increases of between 5 p.p. and 6.25 p.p. The TM20 rate of private banks ended the month at 37.8%, showing an increase of 3.9 p.p. compared to the end of June. Meanwhile, the BADLAR of private banks ended July at 35.2%, 2.5 p.p. above June.

The seasonal increase in the demand for money, associated with winter vacations and the receipt of the complementary annual half salary, boosted the nominal growth of private M2, which reached 4.3% in July, totaling 21.1% in the last 12 months, below inflation. Private sector time deposits in pesos also grew, so private M3 increased 3.5% in July and 24.4% compared to 12 months ago. In turn, the broad monetary base – which adds the monetary base, the balance of LEBACs and passes of financial institutions and the LELIQs – presented a year-on-year growth of 27.4%, also below inflation. In real and seasonally adjusted terms, private sector aggregates decreased again: 2% for private M2 and 1.5% for private M3.

In nominal terms, loans in pesos to the private sector increased 1.2% compared to June and completed a year-on-year growth of 47.3%. When considering the balances in real and seasonally adjusted terms, it can be seen that they interrupted the growing trend they had shown until the first part of the year: loans in pesos fell 0.9% in July, with falls in almost all lines of credit. Adding financing in foreign currency, loans to the private sector registered a decrease of 1.6%, with a year-on-year variation of 21.9%. In the segment in pesos, the only line that grew in real terms was advances (0.8%). On the other hand, mortgage loans, which had shown sustained growth for 18 months, stopped growing in real and seasonally adjusted terms.

The nominal growth in loans to the private sector, below that recorded by deposits, and the surplus in the reserve position that they had accumulated during the first two months included in the quarterly period ending in July, helped financial institutions to meet the higher reserve requirements with a moderate reduction in their excess liquidity. In this way, total liquidity remains at levels above 40% of deposits, with a shift in favour of mandatory bank reserves and to the detriment of excess liquidity.