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Central Bank (BCRA) pauses easing cycle in October 2016

At its weekly meeting on 4 October, the Central Bank of the Argentine Republic (BCRA) decided to keep the 35-day Lebac interest rate unchanged at 26.75%, matching the previous week’s decision. The Bank has cut the 35-day Lebac rate by 11.25 percentage points in the last five months in an effort to bring down inflation. This year, inflation has been stubbornly high after the government scrapped capital controls and ended some subsidies.

In its press release, the BCRA acknowledged that the most recent Market Expectation Survey (REM) suggested that the monthly variation in consumer prices for the last quarter of the year will remain slightly above the Bank’s target at or below 1.50% . On 27 September, the Central Bank announced that it will adopt an inflation targeting regime starting in January 2017. It reiterated its long-term commitment to bring inflation down to 5.0% by 2019 and also formally announced the inflation target ranges for the next three years (2017: 12%–17%; 2018: 8%–12%; 2019: 3.5%–6.5%). Moreover, starting from January 2017, the 7-day repurchase agreement interest rate will be the new main policy instrument, thus replacing the current 35-day Lebac interest rate.

At its latest meeting, the Bank commented that despite the disinflationary process that has materialized in the last months, inflation expectations for next year remain 3 percentage points above the upper bound of the Bank’s inflation target. Taking this into consideration, the BCRA decided to maintain the 35-day Lebac rate unchanged. Analysts at JPMorgan expect the Bank to continue maintaining a cautious stance:

“We have flagged that inflation persistence is likely to increase when reaching levels around 20%, given both the institutional price setting framework (e.g., wage negotiations based on trailing inflation) as well as the fiscal imbalance that we believe will also be hefty next year […]. Therefore, we expect the central bank to maintain a cautious stance, keeping positive ex-ante real rates north of 4% in order to consolidate dis-inflation process.”

Participants in the LatinFocus Consensus Forecast see the 35-day Lebac rate ending 2016 at an average of 24.7%. Panelists see the 35-day Lebac rate ending 2017 at an average of 20.1%.

Argentina - Money Data

2011  2012  2013  2014  2015  
Money (annual variation in %)29.8  38.4  25.7  28.9  28.2  

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Argentina Money Chart

Argentina Money
Note: Annual variation of M2 in %.
Source: Argentina Central Bank and FocusEconomics calculations.

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