Argentina: Central Bank maintains tight monetary conditions despite plunging economic activity
At its latest meeting held on 7 August, the Central Bank of Argentina (Banco Central de la República Argentina, BCRA) decided to change its key policy instrument from the seven-day repo reference rate (seven-day LEBAC rate) to the seven-day liquidity bills rate (seven-day LELIQ rate). Moreover, it increased the seven-day LELIQ rate from 37.00% to 40.00%, the same level at which the seven-day repo reference rate was previously held. The move does not represent a substantial shift, as the markets for both LEBAC and LELIQ are operated by local banks; the key difference is that LELIQ is not subject to the gross income tax payment. The Bank decided to change the policy rate as the BCRA is gradually reducing the stock of LEBAC and therefore the seven-day LEBAC rate will diminish in importance going forward.
The shift was not expected by markets, unlike the decision to keep the key rate at 40.00%, as the Bank attempts to restore confidence following a heavy devaluation of the peso and intervention from the International Monetary Fund. Moreover, the Bank reiterated its intention to monitor monetary aggregates as a complement to the policy rate tool, although it did not communicate growth targets for the monetary aggregates it had started to track in the previous monetary policy meeting.
Surging inflation was behind the Central Bank’s decision. According to the National Statistics Institute (INDEC), national consumer prices jumped 3.7% month-on-month in June, which was notably higher than May’s 2.1% increase and was influenced by strong pass-through effects from a weaker currency. Although the Bank expects inflation to decelerate in the August–October period, the scope of the deceleration will be restrained by planned hikes in regulated prices. Given it considers financial stability essential to growth, contracting economic activity in both April and May did not prevent the Bank from sticking to a hawkish stance. Moreover, the expected rebound in agricultural production and the stabilization of financial markets will gradually lead to a recovery in economic activity, although it will take some time to materialize.
The Bank stated that it remains ready to take additional action to contain inflation if needed. Moreover, it supports the government’s ongoing efforts to curb public expenditure and the commitment made by the BCRA not to finance the Treasury in order to contain inflation. A tight monetary stance is viewed as essential to anchoring market expectations and bringing inflation to target.
The next monetary policy meeting will be held on 11 September.