Argentina: Central Bank introduces a temporary tweak to monetary-base target and extends lower floor for LELIQ rate
July 22, 2019
At its latest meeting held on 22 July, the Central Bank of Argentina (BCRA) stated it will temporarily adopt a two-month-average compliance assessment for the monetary base objective, rather than a monthly one, to adapt the monetary policy framework to the volatility of money demand. At the same time, the BCRA extended the temporary floor for the LELIQ rate it introduced on 1 July until mid-August, in order to continue its fight against inflation.
The BCRA observed that the expected peak in demand for money in July, due to the southern hemisphere winter vacation, actually materialized. Therefore, the Bank decided to temporarily move to a two-month evaluation of the fulfillment of the monetary base in the July-August period, in order to avoid an excessive tightening of the monetary policy stance in July followed by a relaxation in August—when demand for money traditionally moderates. To ensure that this change does not translate into an excessive loosening of monetary conditions, the Bank extended the 58.0% floor for the LELIQ rate introduced on 1 July, until July’s inflation figures are published on 15 August.
Starting 1 October, as stipulated in the standby agreement with the IMF, the Bank adopted a rigid monetary rule which sets monthly growth for the monetary base at 0%. As part of the agreement, the Central Bank also adopted an FX regime which combines a free-floating range for the peso while preventing excessive ARS/USD fluctuations. Given that the Bank will continue to limit growth in the monetary base, inflation should subsequently moderate, while LELIQ interest rates should edge down.