Thursday, January 6, 2022

Argentina raises rate to ensure positive real returns

      Argentina's central bank raised its benchmark Leliq interest rate for the first time in more than a year, saying this was as part of a redesign of its monetary policy instruments to meet its 2022 goal of setting interest rates that result in a positive real return on investments in the domestic peso, and preserve monetary and exchange rate stability.
      The Board of the Central Bank of the Argentine Republic (BCRA) raised the interest rate on 28-day Leliq notes by 2 percentage points to 40.0 percent and expanded the maximum limit for holding the notes.
      It is the first time the Argentine central bank has raised the Leliq rate since November 2020 when it was returned to 38.0 percent after two rate cuts that totaled 2 percentage points in October 2020. 
      Prior to those two rate cuts, the Leliq rate had been at 38.0 percent since March 2020 after a flurry of interest rate cuts that began in November 2019. Between November 2019 and March 2020 the Leliq rate was cut 8 times and by a total of 30 percentage points from 68 percent.
      Today's rate hike comes after the International Monetary Fund (IMF) on Dec. 10 said the latest talks with Argentina included discussions on "an appropriate" monetary policy with interest rates that are higher than inflation.
      The IMF and Argentina are in talks over a rescheduling payments on more than US$40 billion in debt that is owned from a 2018 agreement.
      Argentina's inflation rate has eased in the last three months to 51.2 percent in November from 52.5 percent in September and BCRA said factors that have put upward pressure on prices are expected to subside this year, with prudent liquidity management along with exchange and interest rate policy helping improve exchange rate expectations.
     In addition to cutting the rate on the benchmark 28-day notes, BCRA said it had also created a new 180-day Leliq, with the rate set at 44.0 percent.
     "These decisions seek a rearrangement of the interest rate scheme and a simplification of the organization of systemic liquidity," BCRA said.
     Auctions for the 28-day notes will be held twice a week and once a week for the 180-day notes, which the central bank said would help extend the reference rate curve and move toward longer maturities.
     BCRA said the 28-day Leliq notes will continue to be the bank's benchmark for monetary policy stance, which will be complemented by its participation in the secondary market for public securities to align the rate structure and guarantee liquidity in these instruments.
     To promote a return of time deposits to peso, the central bank also raised the minimum limit of interest rates on fixed terms, with the floor set at 39 percent for 30-day deposits for individuals and a minimum 37 percent for other depositors.



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