Argentina: Central Bank introduces a floor on LELIQ rate to curb inflation
April 1, 2019
At its latest meeting held on 1 April, the Central Bank of Argentina (Banco Central de la República Argentina, BCRA) introduced a floor for the LELIQ rate during April, in order to intensify its fight against inflation. At the same time, the BCRA stated it overachieved the 0% monetary base growth target in March and that it will maintain its current stance on monetary base until the end of the year.
Higher-than-expected inflation in January and February, as well as concerns about strong price pressures in March and April, led the Central Bank to tighten its monetary policy strategy. The Bank therefore introduced a floor for the LELIQ rate during April, set at 62.5%. The BCRA consequently announced it will absorb the necessary liquidity in order to support the newly-introduced minimum rate, at the same time leaving the LELIQ rate free to move above the floor. The decision aims to drain liquidity, limit potential depreciations in the peso and thus to bring inflation down.
Starting 1 October, as stipulated in the standby agreement with the IMF, the Bank adopted a rigid monetary rule which sets a 0% monthly growth for the monetary base. As part of the agreement, the Central Bank also adopted an FX regime, which combines a free-floating range for the peso with the prevention of excessive ARS/USD fluctuations. As the Bank will continue to limit growth in the monetary base and intervene in the FX market, inflation should subsequently moderate and LELIQ interest rates will edge down. Panelists participating in the LatinFocus Consensus Forecast seeing the LELIQ rate ending 2019 at 37.33% and 2020 at 25.97%.