Argentina Monetary Policy January 2020

Argentina

Argentina: Central Bank lowers interest rate floor at January meeting, raising the spectre of a rapid monetary expansion

January 15, 2020

On 9 January, in a bid to stimulate the economy, the Central Bank of Argentina (BCRA) decided to reduce the lower floor for the LELIQ rate to 52.0% from 55.0%, a move which could prompt a further rapid expansion of liquidity. On 26 December, the Central Bank had set a new lower floor for the LELIQ rate, at 55.0%, following a previous five-percentage-point cut on 19 December. This brings the total number of lower-floor cuts delivered by the new BCRA’s President Miquel Ángel Pesce, who took office on 10 December, to three in just one month.

The move is all the more worrying when read together with latest data on the evolution of the monetary base. The latest bulletin published by the BCRA shows that the monetary base jumped in the last two months of last year, which, together with lower interest rates, could lead to a strong injection of liquidity, put pressure on the peso and stoke inflationary pressures.

Going forward, it is highly unlikely that the utility price freeze and the tax on hard currency purchases approved by the new Peronist government, coupled with the Bank’s repeated interventions in the FX market, will lead to a sizable reduction of the inflation rate, help sustain demand for peso-denominated assets and thus contain capital flight, unless serious measures are taken to curb the expansion of the monetary base.

FocusEconomics analysts see the LELIQ rate ending 2020 at 40.55% and 2021 at 31.35%.


Author: Massimo Bassetti, Economist

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Argentina Monetary Policy January 2019 0

Note: 35-day Lebac rate in %.
Source: Central Bank of the Argentine Republic (Banco Central de la República Argentina).


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