The BCRA resists making changes in the interest rate to combat inflation, contrary to its regional peers

Melina Manfredi

Martin Guzman ensures that the difference between your inflation target 29% for this year and the current record -up of 40% – is a consequence of the international rise in prices. However, most of the countries do not register the increases seen in Argentina.

Despite these more modest figures, most of the central banks of the region is taking concrete measures of monetary policy to try to control the rise in prices.

Read also: From fiscal deficit to reference rate: keys to understanding the axes of the current economic discussion

One of the typical monetary tools is raise the interest rate reference, which today corresponds to the yield of the Liquidity Letters (Leliq), that is, the debt issued by the Central Bank (BCRA) to withdraw pesos from the street.

Although only banks can invest in Leliq, its rate functions as a reference for other instruments, such as Fixed deadlines. Thus, an improvement in that return increases the attractiveness of those investments and discourages the use of weights to buy goods, services or dollars.

In recent months, the monetary authorities of Brazil, Paraguay, Colombia, Mexico, Chile and Peru reference rates increased. However, the BCRA has kept it unchanged at 38% since November last year. In the same period, inflation exceeded 50%. Therefore, for economists it will be fundamental a raise on the performance of pesos over the next few months to fight the race against prices and subtract fuel from the gap would change.

Negative rates

The diagnosis shared by economists is that the benchmark rate of 38% is negative, both against inflation expectations and in comparison with the expected devaluation of the peso. Along these lines, they agreed that it would be recommended that the BCRA upward adjustment the performance of the Leliq.

“We are with reference rate levels in the range, between 30% and 40%, when inflation and expectations are released above 50% and with pending adjustments in exchange rate and fees, that surely can accelerate prices or generate the projection of an increase in inflation “, explained the economist Rodrigo Alvarez.

“The rate is frankly negative ex-ante against expectations and, furthermore, it also runs behind the gap exchange rate and the expectations of correction of the official exchange rate, given the inflation that is expected for next year ”, it agreed Gabriel Caamano, partner of Ledesma Consultant.

To its turn, Matías De Luca, economist of LCG, stated: “Argentina has negative real rates, a model that has already been used in the past, which seeks to encourage consumption but it has significant medium and long-term consequences, including the lack of savings and investment”.

Within the BCRA, the diagnosis is different and they maintain the fixed interest rate for give the Treasury room to raise bond yields that it regularly places on the market and collects pesos in that way. In this way, the monetary authority liquefies its stock of debt, avoids paying an increasing interest burden and reduces assistance to the treasury.

How much the Central Bank should raise the rate

In case of raising the reference rate, the unknown is the level to which it should reach. For Caamaño, the performance should follow the evolution of prices and the official exchange rate.

Read also: Dollar, retiree bonus and fees: the definitions of Gabriela Cerruti, the spokesperson for the Presidency

“Today we are the nominal annual rate (TNA) of Leliq is 38%, which is equivalent to an effective rate of 45%. We should be thinking, at least, of an effective rate higher than 50%, where inflation expectations are. Therefore, the TNA it should be between 40% and 45%, which is around 3.5% per month and a 55% effective annual rate ”, he calculated.

For his part, De Luca pointed out: “With annual inflation consolidated at 50%, with no prospect of it diminishing, a rate increase would be positive. However, it would mean increasing them considerably, while there is an underlying problem that is the high stock of remunerated liabilities of the BCRA that grows at 45% annually. In this sense, it is also essential to clean up the Central Bank’s balance sheet ”.

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