Monthly Monetary Report

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

Summary

• The month of May was characterized by an increase in the demand for foreign currency, which was not related to the situation of the financial market or to the fundamentals of the economy. In this context, the Central Bank intervened by generating all possible liquidity instruments in both local and foreign currency in order to mitigate expectations. In effect, active passes continued to be offered at a fixed interest rate (for up to $3,000 million), the scheme for granting active passes in pesos was modified with a margin over the BADLAR rate, which went from being tendered to being established at a fixed level, and a mechanism for the provision of active passes in dollars was created. As a result of the actions carried out, the fluctuations of the financial variables were limited and the average balances of total deposits in pesos, of the means of payment (M2) and of M3 (M2 plus time deposits) showed increases compared to
the averages of the previous month.

• The average balance of M2 showed a monthly increase of $2,000 million (1.3%) and accumulated a year-on-year growth of 16%. Considering its components, the monthly increase in M2 was based on a rise of $1,500 million (1.7%) in demand accounts, while working capital held by the public also showed an increase, although more moderate, of $500 million (0.8%). On the other hand, total deposits in pesos and M3 also increased in the month under analysis, by $400 million and $900 million, respectively, accumulating variations of 17% and 18%, respectively, in relation to May 2007.

• Bank liquidity indicators remained at very high levels in May. In fact, the most restricted bank liquidity ratio – defined as cash in banks, bank current accounts in the BCRA and passive passes for the BCRA, as a percentage of deposits in pesos – stood at 18.7%, above the average value it presented in the last two years. In addition, banks ended the month with a reserve requirement surplus of 0.4% of total deposits. It is worth mentioning that, in order to avoid excessive volatility in the money market, the Central Bank established a bimonthly period for the reserve requirements for June and July 2008. Similar to the provisions for the two-month period October-November 2007, it was provided that surpluses from the first month may not be carried over to the second month of the two-month period.

• In a framework in which the Central Bank acted in the foreign exchange market, the absorption of pesos derived from the sale of foreign currency was partially compensated with various mechanisms, which mainly included the repurchase of Lebac and Nobac in the secondary market and the partial renewal of their maturities. In this way, the Central Bank once again ratified the liquidity reserve characteristic of these securities, which are issued when there is excessive liquidity and are redeemed when market conditions require it. This countercyclical management of liquidity made it possible to avoid excessive fluctuations in interbank rates. A more comprehensive measure of liquidity, which includes the bank portfolio of the aforementioned securities, stood at 38% in the month under analysis, a figure similar to that of recent months.

• Loans to the private sector, in pesos and in foreign currency, registered a monthly increase of 3.3% ($3,880 million). In particular, in the segment in pesos, the monthly increase was 3.5% ($3,450 million), although to a large extent it was explained by the carry-over effect of the strong growth presented by commercial lines during April. In year-on-year terms, the increase in financing in pesos stood at 42.6%.

• In mid-May, the Central Bank ordered increases of between 0.75 p.p. and 1 p.p. for the transfer operations in which it participates. From then on, the 7-day fixed interest rate passes are agreed at 9% and 11%, for passive and active operations, respectively. On the other hand, on May 30, the Central Bank created a mechanism for the provision of active passes in dollars, as an additional sign of its willingness and ability to offer the foreign currency that the market demands. However, there was no significant demand for active passes, both in pesos and dollars.

• Short-term interest rates increased in the month, especially those related to wholesale fixed-term deposits (amounts over $1,000,000). Thus, the monthly average of the BADLAR rate for private banks stood at 13%, with a rise of 4.3 p.p. compared to the level recorded in April. For its part, the interest rates on retail placements (amounts less than $100,000) stood at an average of 9.3%, registering a monthly increase of 0.9 p.p.. In the interbank market, the interest rate increased by 2.0 p.p. and averaged the month at around 10%.