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Argentina Monetary Policy September 2018

Argentina: Central Bank maintains tight monetary conditions despite plunging economic activity

At its latest meeting held on 11 September, the Central Bank of Argentina (Banco Central de la República Argentina, BCRA) decided to leave the seven-day liquidity bills rate (seven-day LELIQ rate) unchanged at an all-time high of 60.00%. The decision was widely expected by market analysts as the Bank attempts to restore confidence and limit currency volatility by supporting the peso. This follows months of financial volatility and several currency selloffs throughout the second and the third quarters.

According to the National Statistics Institute (INDEC), national consumer prices jumped 3.7% and 3.1% month-on-month in June and July, respectively, influenced by strong pass-through effects from the weak currency. Despite the deceleration in inflation recorded in July, price pressures are deemed to intensify in August and September, due to hikes in regulated prices and FX volatility. Inflation expectations spiked accordingly. Economic activity in Q2 contracted notably due to the delayed impacts of a severe drought in the first quarter, tightening monetary conditions and financial turmoil. GDP in 2018 as a whole is consequently also expected to decline.

In its communiqué, the Bank stated it would not cut rates until at least December and will continue to monitor monetary aggregates. Curbing public spending along the lines of the agreement with the IMF, together with the BCRA’s commitment to no longer finance the Treasury and to reduce the system’s excess liquidity, are considered key to containing inflation going forward. However, external risks persist due to a possible reignition of emerging-market financial instability. The Bank therefore stated that it stands ready to take further measures if necessary to tackle inflation.

The next monetary policy meeting is scheduled for 9 October.

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