Argentina: Argentine Central Bank tightens its belt as officials unexpectedly hike rates
April 18, 2017
At its weekly monetary policy meeting on 11 April, the Central Bank of the Argentine Republic (BCRA) decided to change gears and lifted its main interest rate by 150 basis points as inflationary pressures remain resilient. The 7-day Repo Reference Rate was thus hiked to 26.25%, while the width of the repo corridor was left unchanged. Although the timing and magnitude of the move came as a surprise to analysts, who had expected the Bank to stay put, recent statements from monetary authorities had already suggested that officials were willing to take a harder stance on inflation. Indeed, recent inflation reports had made this year’s inflation target a long shot, to which the Bank has now answered by aggressively hiking its main policy rate.
The BCRA also increased its official 35-day Lebac rate on 18 April—in secondary markets it had already traded higher—by 200 basis points, reaching 24.25%. Although the Bank uses the 7-day Repo Reference Rate as its main monetary instrument, the repos only represent around 13% of total monetary stocks. Conversely, the Lebac, with a total stock of ARS 752 billion compared to ARS 135 billion of repos, still has a bigger influence than repos on the local market.
In its press release, the BCRA acknowledged that inflation in the first quarter of 2017, although well below the figures seen in the same period of last year, was still inconsistent with the inflation target for this year, which sits at a range of 12% to 17%. The Bank had expected regulated prices to fuel inflationary pressures as the government continued with its raising of utility tariffs. However, in its report the BCRA recognized that core prices, which exclude regulated items and seasonal goods, were unexpectedly resilient. Thus, the government sought to tame still lingering inflationary pressures by hiking its main monetary policy rate. The Bank had in fact already turned hawkish in secondary markets, absorbing ARS 88 billion between end-February and 10 April.
BCRA officials seem committed to the inflation target range for 2017, demonstrating their willingness to hike rates if necessary. Although this is likely to reduce the prevailing credibility premium in secondary markets, an important caveat is the timing of the move. The Argentinean economy is gradually shifting into growth mode and, this being an electoral year, fiscal policy is expected to be somewhat expansionary. Thus, risks to growth exist as the Bank adopts a tightening stance. The economy is showing some signs of economic recovery, but demand is still weak. The trade-off between inflation and growth depends on how and how fast inflation declines. A more contractionary policy stance would not only imply lower inflation expectations but may result in a decline in growth expectations, together with a stronger currency.
Although the relevance authorities established to the lack of inflation expectations convergence is noteworthy, forward looking guidance was not overwhelmingly hawkish. The one-off nature of the move—highlighted by the magnitude of the hike—means that the BCRA will likely stay put in upcoming months before initiating an easing cycle as the disinflation trend accelerates towards the end of the year.
Author: David Ampudia, Economist