Monthly Monetary Report

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

Summary

• In the course of May, the various price indices that were published corroborated the Central Bank’s view of inflation dynamics: the transitory increase that has occurred since the end of 2015 was
mainly related to a readjustment of relative prices, with a greater impact on the metropolitan area. Following these changes, the Central Bank expects inflation to fall rapidly to pre-occurring levels, and then adopt a gradually downward trend.

• In the Autonomous City of Buenos Aires (C.A.B.A), as expected, there was an acceleration of inflation in April due to the increase in public services. On the other hand, the “remainder” inflation of the same month, which tries to capture the
underlying trend of the general price level, by excluding seasonal and regulated components, showed the lowest monthly growth since last November. Similarly, the April price index of San Luis showed a higher monthly increase than the previous month, but more than half of its increase was due to the incidence of the item “Housing and basic services”. The INDEC wholesale price index was also published, which showed a sustained slowdown over the course of the first four months. In turn, inflation expectations have shown a slight decline as the effects of relative price changes are overcome.

• Considering these indicators and various surveys of prices and inflation expectations, in order to limit the increase in the contractionary bias of monetary policy, the Central Bank decided to reduce its benchmark interest rate, the one corresponding to the 35-day LEBAC, on four occasions during May, for a total of 3.75 p.p. Thus, the 35-day LEBAC cut-off interest rate stood at 34.25% in the last auction of the month. In addition, it kept the corridor established through the interest rates of pass operations unchanged.

• The Central Bank will continue to exercise caution, maintaining its contractionary bias and, in particular, monitoring for no significant or lasting changes in the downward trend in core inflation or inflation expectations.

• Shorter-term interest rates – mainly those operated in the interfinancial markets and those applied to loans granted through advances of up to 7 days – remained within the interest rate
corridor established by the Central Bank.

• In May, the BCRA carried out a series of operations in the foreign exchange market aimed at strengthening its balance sheet, increasing its international reserves. Net purchases of foreign currency were made from both the private and public sectors, totaling approximately US$4,200 million. The expansion generated by these operations was mainly sterilized through the placement of LEBAC. It should be clarified that purchases of foreign currency from the National Treasury do not constitute transfers. They do not have a net equity effect on the BCRA’s balance sheet, but only on the composition of its assets and liabilities. In the same way that when the BCRA buys foreign currency from other official entities, provinces, or the private sector, it is not a matter of transfers to these agents, but of exchange operations.

• In the monetary policy scheme of setting the interest rate, the quantity of money is regulated endogenously, according to the demand for liquidity existing at that rate level. In May, the year-on-year growth of the monetary base continued to decline and reached 24.8%, 2.3 p.p. below that of April. Broader monetary aggregates also continued to decelerate. Private sector means of payment (private M2) reached a growth of 23% YoY, 2.5 p.p. lower than the previous month, while M3 reduced its year-on-year increase by 1.2 p.p., to 24.6%.

• Bank liquidity in pesos (including holding of LEBAC, passes with the BCRA, current accounts at the BCRA and cash) remained at adequate levels. In terms of deposits in local currency, it increased 1 p.p. compared to the previous month, standing at 37.8%. The monthly increase occurred in a context in which financial institutions allocated the increase in deposits mainly to increase the balances of passes at the Central Bank.

• Effective as of June, the Central Bank ordered an increase in reserve requirement ratios. For deposits in pesos, the increase will be 2.5 p.p. for demand placements and 1.5 p.p. for time deposits with a shorter residual term. Starting in July, additional increases of the same magnitude will apply. This measure seeks to ensure that the effort of monetary contraction that the Central Bank has been implementing since the beginning of the year is shared by all actors in the financial sector.