Argentina: Central Bank sets new interest rate floor and tightens capital controls to limit dollar demand
On 30 October, the Central Bank of Argentina (BCRA) set a new temporary lower floor for the LELIQ rate in order to support demand for pesos. The move follows the decision three days prior to significantly tighten restrictions on dollar purchases, in a bid to stabilize the exchange rate and limit outflows of foreign reserves following the victory of Alberto Fernández in general elections on the same day.
In order to continue protecting the local currency and prevent an excessive depreciation of the peso, on 30 October, the Central Bank set a new temporary lower floor for the LELIQ rate, at 63.0% for November, having sat at 78.0% for September and at 68.0% for October. The Bank also announced it would allow the money base to increase 2.5% in November, the same target previously set for both September and October; the follow-up report subsequently showed that the money base rose by less than 2.5% in October.
On 27 October, the BCRA slashed the amount of dollars individuals could buy from USD 10,000 per month to USD 200 per month. The measure will be in place until December, when the new Peronist government will take over the reins, and is meant to stabilize the exchange rate, curb dollar demand and smooth the transition process. Since 1 September, the Central Bank of Argentina (BCRA) had restricted dollar purchases to USD 10,000, in an effort to support the peso and combat financial turmoil which followed the crisis of confidence triggered by August’s primary elections.
Although measures to contain capital flight have so far helped contain the depletion of foreign reserves, there is growing evidence that they are fueling a parallel market for the USD. Thus, in the likely event that the new government does not abolish them, they will further drag on investment activity ahead.