Monthly Monetary Report

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

Summary

• The policy of the Central Bank during the disinflation period is to set an expected real interest rate that is sufficiently positive so that inflation is reduced at the desired rate. According to the Monetary Policy plan presented in April, this implies reaching the last quarter of 2016 with monthly inflation rates close to 1.5%.

• In June, the National Institute of Statistics and Census (INDEC) again published reliable inflation data. It released a consumer price index for the City of Buenos Aires and Greater Buenos Aires. According to this indicator, in May prices increased 4.2% compared to April, as a result of a weighted average between a 2.7% record in core inflation and increases of 8.7% and 4.3% in regulated and seasonal prices, respectively. Considering its greater coverage, the Central Bank will use the INDEC index to evaluate the progress of inflation and the result of its monetary policy, as long as a national price index is not available. In any case, it will continue to monitor other sources of price information, both public and private, on a monthly and weekly basis.

• The Central Bank considers that during June the disinflation trend continued on the path that leads to its objectives for this year. The increase in core inflation in May in the City of Buenos Aires was not enough to alter that view, in the presence of other robust indicators that revealed a slowdown for June. In addition, the surveys of inflation expectations by consulting firms foresee for the rest of the year a disinflation similar to that sought by the Central Bank. The monetary authority will continue to act cautiously, maintaining its contractionary bias and, in particular, monitoring that there are no significant or lasting alterations in the downward trend in core inflation or in inflation expectations.

• Taking into account all the available information, in June the Central Bank reduced its main benchmark interest rate, corresponding to the 35-day LEBAC, on four occasions, for a total of 3.5 p.p.; taking it to 30.75% at the end of the month. In turn, it ordered a reduction of the same magnitude for the interest rates of its pass operations. It should be clarified that, in order to assess the bias of monetary policy, the nominal interest rate for each term must be compared with the inflation projected for the corresponding period. In particular, during a disinflation process, the 35-day LEBAC interest rate should be compared with the expected trend of inflation for that same period, without considering transitory factors.

• 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 a downward trend in line with the decrease in the policy rate throughout the month, and always within the interest rate corridor established by the Central Bank in the pass market. In turn, passive interest rates also accompanied the evolution of the 35-day LEBAC interest rate.

• In June, there was an increase in bank reserves as a result of the increase in reserve requirements for deposits in pesos. Thus, the increase in the current accounts of financial institutions at the Central Bank to integrate the higher reserve requirements explained around 70% of the monthly increase in the monetary base. The Central Bank’s purchases of foreign currency, both from the private and public sectors, were 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.

• In a period in which loans in pesos to the private sector continued to decelerate, the increase in deposits in pesos allowed financial institutions to integrate the higher reserve requirements and also increased their liquidity held 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, net passes with this entity and the holding of LEBAC, as a percentage of deposits in pesos) increased 2.9 p.p. compared to the previous month, reaching 40.5%.

• The purchases of foreign currency made by the Central Bank, added to the income associated with debt placements, mainly from provincial governments, allowed international reserves to grow by US$336 million in the month, ending the period at US$30,507 million. On the other hand, this month the Central Bank finished canceling the dollar futures contracts that had been initiated in 2015. Thus, the Central Bank’s balance sheet continued to consolidate, both through the increase in liquid assets in foreign currency and through the termination of these contracts.