Wednesday, April 12, 2017

Argentina raises rate 1st time this year as inflation rises

    The Central Bank of Argentina (BCRA) raised its monetary policy rate by 150 basis points to 26.25 percent, the first change in the rate since it was introduced this year, saying it considers it "appropriate to tighten liquidity conditions to ensure that the disinflation process in the coming months is consistent with the targets set for the year."
     The BCRA began using the 7-day interbank lending rate as its reference rate in January after using the rate on 35-day Lebac securities, which were auctioned once a week to mop up liquidity.
    When the central bank switched to the 7-day lending rate as its benchmark, it maintained the rate at 24.75 percent, the level of the Lebac since Nov. 29, 2016. Last year the Lebac rate was lowered from a high of 38.0 percent as inflation and inflation expectations eased.
     But inflation has been volatile as the government of President Mauricio Marcri, who took office in December 2015, continues to remove a raft of energy and transport subsidies to reduce the fiscal deficit and dismantle the strict economic controls that were implemented by his predecessor, two-term leader Cristina Fernandez de Kirchner.
      Days after taking office, Macri removed currency controls and let the peso float, leading to a devaluation of about 30 percent, pushing up import prices and thus inflation. 
      Marcri has vowed to tackle inflation and under BRCA President Federico Sturzenegger, who took over from Alejandro Vanoli in December 2015, the BCRA in September 2016 adopted inflation targeting instead of a currency swap system.
      The central bank's rate hike on April 11 follows higher-than-expected monthly inflation of 2.4 percent in March compared with February's 2.5 percent, with a survey showing a rise in 2017 general inflation expectations to 21.2 percent from 20.8 percent, much higher than the BCRA's 2017 target of inflation between 12 and 17 percent.
      For 2018 expectations for overall inflation rose while they eased for core inflation, BCRA said, adding they remain above next year's inflation target of 8 - 12 percent.
     The central bank said it had expected inflation to accelerate from low levels in January due to higher regulated prices - electricity prices were raised in February - and higher fresh food prices.
     BCRA added inflation in April would remain higher than its target and core inflation in the last nine months has fluctuated between 1.3 and 1.9 percent, a level that it "considers necessary to reduce."
     The exchange rate of the peso firmed in response to the central bank's rate hike and was trading at 15.16 to the U.S. dollar, up 4.5 percent this year.


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