The Central Bank increased yields in pesos again, following the inflation figure known in February. However, it is still a little far from meeting the IMF's demand, which raises the need to maintain positive interest rates, that is, that they beat inflation.
The Board of Directors of the BCRA defined yesterday at its board meeting a further increase in the benchmark rate, which went from 42.5% to 44.5% per annum. It was an adjustment that he postponed twice, possibly in order not to make more noise in the middle of the approval of the agreement with the IMF that was being discussed last Thursday in the Senate.
The increases, however, still keep the rates in negative terrain as they are below the inflation recorded in recent months.
The objective of the head of the Central Bank, Miguel Pesce, when it comes to raising rates is to reduce the incentive to dollarize and at the same time encourage the demand for pesos. Stabilizing the foreign exchange market is essential for inflation to begin to decline from current levels.
The task is not easy for several reasons. First, the BCRA has little “firepower” because the financial system is too small and no longer accounts for 10% of GDP. Therefore, any change in the rate scheme has a limited impact on the behavior of society.
One of the impacts of the rate hike is on the BCRA's own accounts, which must pay more interest on the issuance of Leliq, passive passes and other paid securities. This debt in pesos is one of the issues of greatest concern to economists, who see a “snowball” together with the heavy issuance of peso bonds that the Treasury also makes to finance the deficit.
In addition, the danger is that increasing the rate so much will end up affecting economic activity. This was one of the unwanted effects of Mauricio Macri's government's monetary policy, when attempts were made to contain the dollar with high interest rates, especially in the last months of 2019. Of course, at that time there was no stocks, so it was essential to stop the increase in the exchange rate with that instrument.
The evolution of peso deposits shows that the strategy is partially successful, but that there is still a long way to go. Fixed terms in local currency accumulated a 5.6% increase in the last month, practically in line with inflation. So far this year the increase has reached 16.6%. This means that forward placements are at least maintained in real terms and at least to some extent collaborate so that there is no greater demand for dollars among investors.
The fixed terms adjusted by CER (i.e. retail inflation) rise much faster, but they still represent a minimal fraction: they only reach 5% of the total. In the accumulated in 2022 they already increased by 25.5% and it has its logic, since the adjustment for inflation beats the rates and also the various financial dollars, which remain practically flat.
As determined by the BCRA at its meeting yesterday, the fixed-term rate for individuals may not be less than 43.5% per annum. Although this is a much lower return than inflation (which accumulates more than 52% in the last twelve months), the effective annual rate is already 53.3%. This return is obtained by reinvesting interest on a monthly basis for one year.
Rate policy is in developed countries a fundamental instrument for adjusting the demand for money and controlling inflation. In Argentina, however, it is another element and one that has a relative weight. In fact, the key factor is the control of monetary issuance, which is closely related to the fiscal deficit.
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