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Argentina Monetary Policy February 2019

Argentina: Central Bank tightens FX intervention rules to curb inflation

At its latest meeting held on 28 February, the Central Bank of Argentina (Banco Central de la República Argentina, BCRA) announced it would tweak its guidelines to intervene in the exchange rate market in order to intensify its fight against inflation. At the same time, the BCRA stated it has overachieved the 0% monetary base growth target and will maintain its current stance. Starting 1 October, as stipulated in the standby agreement with the IMF, the Bank abandoned its previous inflation targeting regime to adopt a rigid monetary rule which consists of keeping the monetary base unchanged until June 2019. The new monetary rule thus sets a 0% monthly growth for the monetary base, defined as currency in circulation plus reserve requirements.

An uptick in inflation in January led the Central Bank to tighten its guidelines for intervention in the FX market. The month-on-month variation in prices accelerated in January following three consecutive months of deceleration, on the back of higher food and regulated prices. The Bank therefore increased the limit of daily sales of dollars in the foreign exchange market in the event that the peso moves above the non-intervention band from USD 75 million to USD 150 million. It also reduced the limit of daily dollar purchases if the peso moves below the lower limit of the non-intervention price band to USD 50 million from USD 75 million. This decision essentially provides further firepower to the Central Bank to limit potential depreciations in the peso and thus to prevent exchange-rate pass-through on inflation.

The Central Bank stands ready to intervene in the foreign exchange market if the peso moves outside the non-intervention band or in the event of considerable exchange rate volatility. As part of the agreement with the IMF, in addition to the monetary base rule, the Central Bank adopted an FX regime, which combines a free-floating range for the peso with the prevention of excessive ARS/USD fluctuations. As the Banks will continue to limit growth in the monetary base and inflation subsequently moderates, LELIQ interest rates will edge down, with panelists participating in the LatinFocus Consensus Forecast seeing the LELIQ rate ending 2019 at 36.57% and 2020 at 25.50%.

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