Tuesday, August 7, 2018

Argentina's new Copom sets Leliq policy rate at 40 pct

       Argentina's central bank kept its monetary policy stance steady and set the interest rate on 7-day liquidity paper, known as Leliq, as its new monetary policy rate at 40.0 percent, the same rate of its key rate since early May.
       The Central Bank of the Argentine Republic (BCRA), which has raised its policy rates three times by 12.75 percentage points since April 27 in an effort to shore up the peso's exchange rate, also reiterated its guidance that it will maintain the contractionary bias of monetary policy until the trajectory of inflation and expected inflation is aligned with the 2019 target.
       BCRA's board said the reason for maintaining the rate was that inflation in June had accelerated more than expected, mainly due to the temporary impact of peso depreciation in May and June. And while inflation is forecast to decelerate in July, this will be less than expected.
       The baseline forecast is for core inflation to decline in August, September and October from a record in July while headline inflation is expected to show a smaller decline due to higher regulated prices in August and October.
       Despite the expected decline in inflation in coming months from July, the central bank said it recognizes that a longer period of financial stability will be required to reduce the risk of a greater than expected transfer of the exchange rate to retail prices.
       Argentina's national headline inflation rate rose to 29.5 percent in June from 26.3 percent in May while core inflation rose to 26.9 percent from 23.6 percent.
       After falling sharply in late April through June, the peso has been steady this month and was trading at 27.39 to the U.S. dollar today, down 32 percent this year.
       In June the International Monetary Fund and Argentina agreed on a 3-year, $50 billion support package that included new inflation targets for BCRA and a new central bank law that will strengthen its operational and financial autonomy.
       The new targets are for inflation below 22 percent for the second quarter of 2019 and for inflation of 17 percent for 2019. For 2020 an inflation target of 13 percent has been set and for 2021 a target of 9 percent. By 2022 BCRA is targeting 5 percent inflation, its estimate of price stability.
        In a separate statement, BCRA also said it had set up a new monetary policy committee, Copom, composed of Luis Caputo, central bank's president, Vice President Gustavo Canonero, Director Enrique Szewach, who is appointed by the central bank's board, and on an interim basis, Mauro Alessandro, head of strategy and monetary policy communications.
      On a permanent basis, the fourth member of Copom will be the deputy general manager of economic research.
       In the event of a tied vote, President Caputo's vote will be deciding. In mid-June Caputo, a former finance minister, took over as BCRA president from Federico Sturzenegger.
       The primary purpose of Copom will be to set BCRA's policy rates and conditions to execute the bank's monetary policy, including lowering the rate on the declining number of 35-day Lebac securities which functioned as a policy rate until January 2017 when BCRA began using the 7-day interbank lending rate as its reference rate.
       In January this year Leliq securities were introduced to give BCRA an additional tools to mob up short-term excess liquidity.
       From now on Copom will meet on the second Tuesday of each month to discuss the monetary policy rate and issue its decision at 5 p.m. local. On the third Tuesday of each month Copom will meet to determine how much to cut the Lebac rate.
       The first meeting of the new Copom is Sept. 11.



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