Monthly Monetary Report

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

Summary

As of October 1, the BCRA adopted a new monetary policy scheme, with strict control of monetary aggregates. It pledged not to increase the monetary base (which includes monetary circulation held by the public, cash in banks and current accounts in pesos of financial institutions in the BCRA) until June 2019. Because there will be high inflation rates in the coming months due to the pass-through of the peso/dollar exchange rate to prices in August, this commitment implies that the monetary base will contract in real terms. To avoid excessive monetary contraction, the target monetary base will be adjusted for the seasonal effect that increases the demand for the monetary base in December and June.

In operational terms, this change of scheme implied that the BCRA began to carry out daily LELIQ auctions for 7 days. The BCRA announces a tentative amount and the minimum placement rate. Once the bids have been received, it determines the cut-off rate and awards with multiple prices. When controlling the amounts, the monetary policy rate, the weighted average of what was placed each day, varies in each auction. In turn, the BCRA can inject or absorb liquidity through LELIQ purchases or sales in the secondary market and limited its intervention in the pass market to operations with a 1-day term. The active pass rate is defined daily and is the result of multiplying a coefficient between 1.01 and 1.5 and the maximum rate paid by the current LELIQs, while the passive pass rate is the result of multiplying a coefficient between 0.5 and 0.99 by the minimum rate announced for the current LELIQs.

The monetary target is complemented by the definition of foreign exchange intervention and non-intervention zones. The non-intervention zone was initially defined – as of October 1 – between 34 and 44 pesos per dollar and is adjusted daily at a rate of 3% per month until the end of 2018. The BCRA will allow the free floating of the peso within this zone. In the event that the exchange rate is above the non-intervention zone, the BCRA will hold daily foreign currency sales auctions for up to US$150 million. These sales will generate an additional contraction of the monetary base that will tend to correct excessive depreciation. In the
event that the exchange rate is below the non-intervention zone, the BCRA may hold auctions for foreign currency purchases and decide whether or not to withdraw from the market the pesos with which these purchases are made.

In September, the BCRA continued with the dismantling of the LEBAC stock. Similar to what was implemented the previous month, banks were unable to bid for their own portfolio and allocated their liquidity mainly to LELIQ, while holders in the non-financial sector who did not renew their LEBACs turned to buying securities issued by the National Treasury, deposits in pesos or demanding foreign currency.

On this occasion, the net placement of National Treasury bills made after the maturity of LEBAC was equivalent to 40% of the fall in the stock of LEBAC in the hands of holders in the non-financial sector, double what was observed in August. These funds went on to increase public deposits and, via the banks that received them, returned to the BCRA through LELIQ.

Another investment alternative that captured part of the fall in the stock of LEBAC was the segment of time deposits, which accelerated their growth rate after the maturity of these securities, mainly in the tranche of higher amounts. In the month, the private sector’s term deposits in pesos increased 3.1% in nominal terms. It is worth mentioning that, effective as of October, the BCRA provided that financial institutions may integrate the total minimum cash requirement in pesos corresponding to the net increase in time deposits with LELIQ. In this way, it encourages the collection of this type of deposits, remunerating their reserve requirements and favoring the increase in the rates received by depositors. Another incentive to encourage savings in pesos is the possibility for banks to pay interest on fixed terms periodically, and not necessarily at maturity, as long as it is within a period of no less than 30 days.

The increase in deposits in pesos and, mainly, the latest increases in the reserve ratios that must be integrated through balances in current accounts at the BCRA generated an increase in the demand for the monetary base associated with bank reserves, while the current currency held by the public continued to decrease. Thus, 78% of the average monthly increase of 6.2% in the monetary base was explained by changes in reserve requirements in pesos. Once excluded, the increase in the monetary base was in line with the increase in total M3 (1.7%), which includes the working capital held by the public and total deposits in pesos. Private M3 (working capital held by the public and deposits in pesos held by the private sector) also increased in nominal terms (1.4%), while, when adjusted for seasonality and inflation, it maintained the downward trend it has been showing since the beginning of this year.

In real and seasonally adjusted terms, loans in pesos to the private sector decreased 3.6% compared to August, with falls in all lines of financing. In nominal terms, they grew 1.3% monthly and their year-on-year growth stood at 39%, slowing down 5 p.p. compared to August.

The dismantling of LEBAC and changes in minimum cash requirements, in a context of slowdown in lending, led to an increase in bank liquidity in pesos with a notable change in its composition. Ample liquidity (current accounts at the BCRA, cash and holdings of LELIQ, LEBAC and 2020 bond) reached 47.2% of deposits, 1.4 p.p. above August. Of the total, 37.7% were assets to integrate reserve requirements and cash held by financial institutions (10.9 p.p. more than in August), while the rest corresponded to surplus or voluntary liquidity (9.5 p.p. less than last month).

To reinforce the contractionary nature of monetary policy, in view of the continuation of the LEBAC disarmament process, the BCRA ordered a new increase in reserve requirements on deposits in pesos as of October. This is a 3 p.p. increase for deposits from larger financial institutions and can be integrated with LELIQ or NOBAC.