2024-01-17 13:49:08
In a significant policy change, the Banco Central of Argentina opted for a new strategy in the management of monetary policy. The institution went from using four-week promissory notes to overnight repos, with the aim of reduce borrowing costs.
How does the transition from 28-day promissory notes to 1-day repos affect the Argentine economy?
This measure marks the end of the Central Bank’s dependence on its notes Leliq to 28 days, which previously established the reference for its official interest rate. From now on, the Central Bank will use the 1 day repo notes, which currently offer an interest rate of 100%. This change is crucial to understanding why macroeconomics is important, as it directly impacts the broader economic environment, influencing factors such as inflationhe employment and the economic growth in general.
The decision is intended to increase the availability of pesos for local banks and boost demand for Treasury bonds. Following this announcement, the Government made public its plans for an auction of debt in pesos with maturities of up to three years.
The analysis of Bloomberg Economics highlights the importance of this change. The change to the overnight repo rate as the main policy tool of the central bank reflects more than just an operational change. It indicates the bank’s confidence in the government’s initial measures, including fiscal adjustments and currency devaluation, to mitigate the rush for US dollars or exacerbate inflation. However, Bloomberg Economics considers this confidence somewhat premature.
Before President Javier Milei took office on December 10, Argentine banks were gradually moving away from Leliq, with record renewal rates observed immediately before and following his inauguration. However, recent policy adjustments have renewed banks’ interest in Leliq.
The government had previously warned that banks’ continued evasion of Leliq might lead to greater circulation of pesos, potentially aggravating an already high inflation rate of 160% year-on-year.
What effect did the new policies have on Argentina’s inflation rate?
The change of political tools of the Banco Central contradicts a key aspect of Argentina’s $44 billion deal with the International Monetary Fund (IMF), which requires that monetary policy rates exceed annual inflation. Despite adjustments for inflation, the new rate barely exceeds the index of consumer prices recorded in November. With inflation forecast for the end of the year above 200%, the rate might fall significantly below zero if it remains unchanged.
In related news, Argentina’s inflation rate accelerated in November ahead of Milei’s major currency devaluation. Consumer prices rose 12.8% in November from the previous month, beating the 11.4% median estimate of economists surveyed by Bloomberg. In year-on-year terms, inflation reached 160.9%, the highest since the early 1990s.
Argentina’s annual inflation reached 161% in November, and is expected to continue rising until the end of the year. At the beginning of December, a 15% price increase was already recorded compared to the previous month, and forecasts point to a possible 20% increase at the end of the month. According to C&T Advisorsthis rise in prices reflects a broader adjustment, which includes fuel costs. JPMorgan Chase & Co. It foresees a cumulative increase in prices of 60% for December and January.
Accompanying the devaluation, the Minister of Economy of mercy, Luis Caputo, announced a series of austerity measures aimed at achieving fiscal balance within the next year 2024. These include critical cuts to energy and transport subsidies, amounting to 2.9% of GDP. Although these measures are expected to be recessionary, the Government assures that they are necessary to rectify previous economic mismanagement.
In conclusion, the recent strategic change in the monetary policy of the Central Bank of Argentina, which went from 28-day Leliq to 1-day repos, represents a bold attempt to overcome the country’s intricate economic challenges. This measure, which reduces the reference interest rate to 100%, reflects an innovative approach to stimulate the economy, increase liquidity and manage rampant inflation. However, it also involves a delicate balancing act, as it deviates from the guidelines stipulated by the IMF and navigates between the uncertainties of economic forecasts and market reactions.
As Argentina faces these economic changes, adjusting the Central Bank’s policy might be a crucial element in leading the country toward a more stable and prosperous future. However, it is imperative to remain aware of the potential impacts and the need for continued assessment and adjustment in response to the evolving economic landscape.
The situation in Argentina is a poignant reminder of the intricate interaction between monetary policy, political decisions, economic realities, and the profound impact these factors have on the lives of citizens and the health of the national economy.
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