The Central Bank again raised the benchmark interest rate and brought it to 44.5% per annum. This is the third time in the year that the BCRA raises the rate of its debt instruments, the Leliq. On January 6, after having spent more than a year without any movement, it had increased it from 38% to 40%; on February 17 it arranged another movement from 40% to 42.5%.
The new benchmark rate also implies that fixed-term rates for individuals, whose new floor will be 43.5% per annum for 30-day taxation to 10 million pesos, representing a yield of 53.3% of annual effective rate (TEA).
“For the rest of the private sector deposits, the guaranteed minimum rate is set at 41.5%, which represents an ASD of 50.4%. Active interest rates remain at favourable levels, especially for investment and production, and the MSME sector. In addition, the BCRA will continue to regulate certain key rates for household consumption,” the BCRA said in a statement.
The decision is framed by two well-marked factors: the first is the surge that the Consumer Price Index showed in its last three records: 3.8% in December, 3.9% in January and 4.7% in February. The second is the agreement with the International Monetary Fund (IMF), which includes as one of the central commitments to achieve monetary and financial goals that deposits have positive real rates, that is, that they have a higher return than inflation.
The Monetary Policy Report (IPOM) released yesterday by the Central, one of the most relevant documents issued by the monetary authority, had already warned about this move and even suggested that it will not be the only upside. “The increase in the monetary policy interest rate seeks to tend towards positive real returns on investments in local currency, in order to boost demand for pesos. That is why, looking ahead, developments in inflation will be reflected in the calibration of interest rates by the monetary authority,” said the BCRA document.
On the other hand, the Central Bank also needs higher rates to meet another of the objectives included in the agreement with the Fund: to accelerate the rise in the official exchange rate as part of the plan to close the gap with the “blue” dollar and financial dollars. During 2021, particularly during the pre-election period, the official dollar rose on average at a rate of 1% per month compared to inflation above 3%, this trend favored the consolidation of the gap, today around 75%.
Without a rate hike, closing that gap becomes an impossible task. For the rise in the official dollar to approach the rise in inflation, fixed terms must have a positive return. Otherwise, investors will have incentives to continue dollarizing their portfolios. Likewise, the foreign exchange market is entering the stage of the greatest liquidation of foreign exchange by agro-exporters. Higher rates will favor them staying in pesos once they have sold their dollars.
In return, the increase in the benchmark rate means that the Central Bank will have to pay a higher cost to absorb money from the market and, with that, prevent it from generating even higher inflation than it does today. Leliq and passes are the instruments he uses to fulfill this task and for that he pays millionaire interest to banks. The total stock of both instruments is 4.7 trillion pesos, which will now pay a higher rate.
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