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Argentina Monetary Policy January 2019

Argentina: Central Bank announces it will continue to stick to 0% monetary base growth target

At its latest meeting held on 2 January, the Central Bank of Argentina (Banco Central de la República Argentina, BCRA) announced it will meet the 0% monetary base growth target in January and could surpass its goal in February and March. Starting 1 October, as stipulated in the standby agreement with the IMF, the Bank abandoned its previous inflation targeting regime to adopt a rigid monetary rule which consists of keeping the monetary base unchanged until June 2019. The new monetary rule thus sets a 0% monthly growth for the monetary base, defined as currency in circulation plus reserve requirements.

A moderation in both inflationary pressures and inflation expectations, compounded by a stabilization of the peso, led the Central Bank to stick to the agreed monetary policy scheme. The month-on-month variation in prices decelerated for the second consecutive month in November, on the back of a stabilization of the peso which begun in early October following the IMF agreement. This was possible as the BCRA exceeded its monetary base objective, which translated into a declining demand for USD. The same factors were behind the BCRA’s decision on 5 December to remove the 60% floor on its LELIQ rate. The Bank was committed to not allowing the LELIQ rate—resulting from LELIQ auctions rather than being directly set by the Bank—to drop below 60% until inflation expectations declined significantly.

The Central Bank stands ready to intervene in the foreign exchange market if the peso moves outside the non-intervention band or in the event of considerable exchange rate volatility. Moreover, the Bank announced it will reduce the monetary base target in case of pronounced peso weakening. As part of the agreement with the IMF, in addition to the monetary base rule, the Central Bank adopted an FX regime, which combines a free-floating range for the peso with the prevention of excessive ARS/USD fluctuations.

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