The Central Bank postponed to today its weekly board meeting, usually held every Thursday, in which it will discuss a further rate hike following the lousy inflation data for February released this week. The moment chosen by the entity led by Miguel Pesce means that the decision coincides with the launch of the “war against inflation” announced by President Alberto Fernández shortly before the latest consumer price index was released. The monetary authority has a lot of room for discretion as to how it can handle the levy within the framework of the program agreed with the IMF whose implementation is imminent. But the acceleration of inflation forces it to some rise in order to meet its commitments.
Pesce and team managed to avoid having to announce a tightening of monetary policy, however slight, on the day when the bill approving the operations of debt included in the IMF program. With much of the ruling party torpedoing the agreement, the situation would have been at least uncomfortable.
In addition, moving from Thursday to Friday its weekly meeting will be able to associate its decision with the “war on inflation” that the President plans to launch today from Casa Rosada. Change can thus be part of a package of measures.
After more than a year of leaving the stable rate at 38% nominal per annum, the Central Bank began to correct the monetary policy rate upwards in January. So far this year he's done two climbs. Last one, a month ago.
The third one would arrive today. And although the current Central Bank administration does not place any value on the interest rate as a method of trying to cool the rate of advance in the general price level, the imminent approval of the agreement with the IMF ties it to rather lax commitments, but which may force an adjustment.
“The BCRA will seek to maintain a positive real effective interest rate also consistent with a sustainable trajectory for BCRA titles,” details the text of the memorandum of understanding published by the IMF in defining what the role of the levy will be
“The determination of the real interest rate shall take into account coincident and prospective inflation measures that will be updated monthly, while other factors, such as the evolution of reserves, will be taken into account. This will help ensure that, in the future, interest rates on term bank deposits remain positive in real terms to support the demand for peso deposits, and the development of the domestic market for public securities,” he adds.
To begin with, these definitions are not part of the objectives of the agreement. Monetary goals hardly force the Central Bank to accumulate international reserves, put a ceiling on monetary financing to the Treasury and also a cap on the entity's position in the dollar futures market.
The rate hike is always uncomfortable for Pesce. Their main concern is that the stock of Leliq, passive passes and other paid liabilities does not grow out of control. Liberated to its own preferences, the strategy was always to keep the rate below inflation so that the interest it pays on those instruments does not generate the “snowball” effect in which the entity ends up having to issue more to pay those interests.
With the current stock of money that is immobilized in Leliq and other liabilities, each percentage point of rate increase means that the BCRA has to pay an additional $4.087 million per month in interest. That figure exceeds the $60 billion annualized if compounded interest is considered (the Central pays principal and interest, sterilizes both with Leliq and then repays interest on rising capital).
“So, in a year, the increase in the rate hits you on capital, and on the interest that you capitalize once a month. At these rates and with these levels of debt, capitalization, which is normally a rounding problem, becomes a major problem because of the increase in Leliq's stock,” said Juan Manuel Pazos of TPCG.
When a month ago the BCRA raised the benchmark rate from 40% to 42.50% nominal annually, government sources clarified that inflation had nothing to do with the decision. It was, rather, a way to allow a faster rise in the official dollar: if the peso rate did not accompany, no one would sell dollars in the formal market.
“For me, the game they are going to try is that the variation of the dollar is lower than the interest rate and that the interest rate is lower than inflation,” said Gabriel Caamaño of Consultora Ledesma.
But beyond the fact that the Central Bank does not have a clear outline for the relationship between the rate in pesos and inflation - a scheme of goals such as the one that was in force for a very short time during the Government of Mauricio Macri - the dimension of the rise in prices in February forces the entire Government to give some kind of response. It was expected 4%, it was 4.7 percent.
The benchmark rate was already running an uneven race with inflation. The current annual nominal 42.50% compares with an inflation expectation of 53.1%, according to the forecasts relieved by the Central Bank itself. If the actual rate is calculated, that 42.50% reaches 51.93% per year, below expected inflation. Thus, Pesce takes care that Leliq's stock grows below inflation, that is, that it falls in real terms.
But 4.7% inflation in February will strongly change inflation expectations. Already in itself such a high number moves all estimates for future months up, even if it is by drag. In addition, the bulk of the impact of the war on commodity prices and the increase in naphtha were located in mid-March, so a spicy number is also expected for this month. The 60% inflation expected for the next few months is no longer crazy for consultants.
Thus, the gap of less than two points between expected inflation and interest rates will quickly widen if Pesce does not raise the rate. Today, for example, a fixed term of 30 days pays 41.50% nominal annual or 50.39% annual effective rate - the one that arises from renewing a fixed term 12 times, each time reinvesting both the capital and the interest received. And higher expected inflation will mean a larger gap between yields in pesos and prices.
Finally, an acceleration in inflation may force the Central Bank to accelerate the rise of the official dollar. Preventing the dollar from falling behind - maintaining a stable “real exchange rate” with respect to levels at the end of 2021 - is the mechanism proposed to achieve the objective of adding reserves. And if inflation hurries that delay, Pesce has one more reason to raise the rate and give way to a faster adjustment of the official dollar.
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