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.

     www.CentralBankNews.info

     

Argentina cuts Leliq 2nd week and raises overnight repo

     Argentina's central bank lowered its benchmark Leliq interest rate for the second consecutive week and raised the overnight repo rate, continuing what it says is a harmonization of its monetary policy interest rates to maintain a positive real return on savings in pesos.

     The Central Bank of the Argentine Republic (BCRA) lowered the interest rate on Leliq notes by another 100 basis points to 36.0 percent it said in a statement from Oct. 15 and has now lowered it by 200 points this month following a similar cut on Oct. 8.

     Since December 2019, when BCRA began lowering the Leliq rate it has been cut by 27 percentage points from 63.0 percent, including 19 percentage points this year.

     The bank's overnight repo rate was raised another 300 basis points to 30 percent and this rate has now been raised by 11 percentage points this month following hikes on Oct. 1, Oct. 8 and Oct. 15.

      BCRA also said it was offering 7-day repos with a interest rate of 33.0 percent and "to complete the transmission of the harmonization of rates," it would also increase the minimum guaranteed rate of fixed terms with an annual yield of 34 percent for deposits of under US$1 million and at 32 percent for other deposits.

      The central bank's change in rates is likely to further encourage banks to shift their purchases toward Treasury bonds instead of Leliq notes.

      In September Argentina emerged from its 9th sovereign default since 1816 following an agreement with international creditors over the restructuring of $65 billion of debt.

      Argentina's peso was trading around 77.47 to the U.S. dollar today. down 22.7 percent this year.

     www.CentralBankNews.info

Argentina cuts Leliq rate first time since March

    Argentina's central bank lowered its benchmark Leliq interest rate for the first time since March but also raised its one-day repo rate in a move it said continues the strategy of unifying the reference rates used in its monetary policy.

     The Central Bank of the Argentine Republic (BCRA) cut the interest rate on Leliq notes by 100 basis points to 37.0 percent, the first cut since March 5, which it said would gradually aligning Treasury rates with the rates used by the central bank in its sterilization instruments.

     Since December 2019, when the central bank began cutting the Leliq rate, BCRA has cut it by 26 percentage points from 63.0 percent and by 18 percentage points in 2020.

     The one-day repo rate was raised by 3 percentage points to 27.0 percent, complementing a 5 percentage point hike in the previous week, the central bank said in a statement on Oct. 8.

     The two rates diverged at the start of the COVID-19 pandemic when the government took action to mitigate the economic and financial effects of the health crises, BCRA said.

     It added the raise in the repo rate and the cut to Leliq rate to align it with Treasury rates will gradually lower the cost of the "quasi-cost of sterilization while increasing its effectiveness in influencing short-term rates in the economy."

     The change in rates is likely to further shift banks' purchases of debt toward Treasury bonds instead of Leliq notes, a move BCRA has encouraged by lowering the amount of Leliq notes banks can hold while raising the amount of Treasury bonds.

     In addition to the change in interest rates, BCRA said it would be more flexible about restructuring plans  submitted by companies that have monthly debt maturities in excess of US$1 million as far as their access to foreign exchange markets.

     On October 1, when BCRA raised the one-day repo rate to 24 percent from 19 percent, it also abandoned its uniform devaluation mechanism of the peso as part of a framework of a managed float in which the daily depreciation rate will be gradually adapted to situation in markets.

     In September Argentina emerged from its ninth sovereign default sine 1816 following an agreement to restructure $65 billion of foreign debt.

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Argentina cuts rate 8th time as inflation decelerates

     Argentina's central bank lowered its benchmark interest rate for the 8th time since the current governor, Miguel Pesce, took over in December last year as part of Alberto Fernandez' new government.
     The Central Bank of the Argentine Republic (BCRA) cut its minimum interest rate on Leliq notes another 200 basis points to 38.0 percent, saying the effective rate was now 45.4 percent and this should be help promote savings in peso and at the same time change the composition of the credit of families and companies through a revival in credit.
     BRCR has now cut its Leliq rate by a total of 25 percentage points since Dec. 19 last year and by 17 percentage points this year.
     "The decision was adopted based on the signs of consolidation of the disinflationary process and wit a view to generating conditions that favor the recovery of economic activity," BCRA said, adding the was still no firm evidence of the country's economy exiting its recessionary phase despite early sings of an improvement in several economic indicators.
     Pesce, a former vice president of BCRA, has been open about his plan to shift away from the more orthodox monetary policy stance that was applied during his predecessor Guido Sandleris.
     Argentina's inflation rate fell to 51.5 percent in January from from 52.9 percent in December, helped by a government freeze on some prices.
     Despite a new government and central bank governor, Argentina's peso has continued to set new record lows and was trading at 62.3 to the U.S. dollar today, down 3.9 percent this year.
     In the central bank's latest poll from this week, analysts lowered their forecast for inflation this year to 40 percent from 41.7 percent last month, with inflation in 2021 falling further to 30.5 percent and then 27 percent in 2022.
     The economy is seen shrinking 1.2 percent this year, better than the 1.5 percent contraction seen in last months poll, with growth in 2021 of 1.7 percent and then 2.0 percent in 2022.

    www.CentralBankNews.info

Argentina freezes Leliq rate at 58% until July inflation

    Argentina's central bank fixed the rate of its benchmark Leliq notes at 58.0 percent until July inflation is announced on Aug. 15 to "guarantee the contractionary nature of the monetary policy."
     The Central Bank of the Argentine Republic (BCRA), which on July 1 lowered the minimum interest rate on Leliq notes to 58.0 percent from 62.50 percent that was set on April 1, added in a statement from July 22 that it may revise the Leliq minimum rate when July inflation numbers are known to reflect inflation, inflation expectations, internal and external and financial conditions, and other macroeconomic data.
     Argentina's inflation data are published by the National Institute of Statistics and Censuses (INDEC) and the national consumer price index inflation for July is scheduled for Aug. 15.
     This follows primaries in the run-up to general elections in October, when Prime Minister Mauricio Macri is up for election.
     In June Argentina's annual inflation rate declined for the first time this year to 55.8 percent from 57.3 percent in May while monthly inflation slowed for the third straight month to 2.7 percent.
     From October 20178 until April this year BCRA employed a monetary policy framework in which the interest rate on Leliq notes was set through auctions, and thus fluctuated daily, while it targeted the monetary base in order to push down inflation.
     The weighted average rate on Leliq notes, which the central bank uses as its monetary policy rate, rose as high as 74 percent on May 2 but since then it has declined and remained below 70 percent since June 6 and below 60 percent since July 5. On July 22 the rate was 58.78 percent.
     The decision to lower the minimum Leliq rate to 58 percent on July 1 was to ensure that its monetary policy did not relax during July, when demand normally rises from the collection of bonuses and expenses in connection with the winter holiday.
     Today BCRA's monetary policy committee COPOM said the goal for the monetary base during the July-August period was unchanged at $1.343 billion and it would be using a bi-monthly average to determine if the monetary base target was met to avoid any excessive contraction in July.

    www.CentralBankNews.info

   

Argentina lowers Leliq floor in July to 58.0 percent

     Argentina's central bank lowered its minimum interest rate for benchmark Leliq notes to 58.0 percent for the month of July, when seasonal demand for working capital rises, as it met its objective for the monetary base for the 9th consecutive month in June.
     Since October 2018 the Central Bank of the Argentina Republic (BCRA) has used a monetary policy framework where the Leliq rate fluctuates daily and is set through auctions.
     Since April 1, when the central bank set a minimum rate of 62.50 percent, the weighted average adjudicated rate, or the monetary policy rate, for Leliq notes has fluctuated between 68.1 percent and 74.1 percent in May to 63.8 percent on June 24.
     BCRA's monetary policy committee COPOM said the average monetary base in June was $1.342 billion, slightly below the goal of $1.343 billion.
     To better manage liquidity conditions during July, when demand rises from the collection of bonuses and expenses in connection with the winter break, and strengthen the transmission of Leliq rates to savers, BCRA is also lowering the minimum rate of cash requirements for time deposits by 300 basis points, releasing about $45 billion.
     But to ensure monetary policy is not relaxed during this seasonal phenomenon, the central bank will retain the June goal for the monetary base during July. In coming months the target for base money would be then be lowered further to ensure continued disinflation.
     Argentina's inflation rate rose to 57.3 percent in May from 55.8 percent in April, with the central bank's poll last month showing analysts expect full-year inflation of just over 40 percent, down from 2018's almost 50 percent, and economic contraction of 1.5 percent.
     COPOM today also extended its limits for exchange rate intervention at 39.755 to 51.448 peso per U.S. dollar until Dec. 31, 2019.
     During March and April Argentina's peso was battered by volatility over nervousness of elections in October and the economy's weakness, but in on April 29 the central bank decided to intervene more actively, boosting the daily limit for sales to $250 million from $150 million and raising fears a return to intervention could put it on course to draw on its foreign reserves.
      Last year BCRA used up $16 billion on its reserves between March and September when the International Monetary Fund boosted its support program to $56 billion.
     After hitting a record low of 45.8 to the U.S. dollar in late April, the peso has rebounded and was trading at 42.4 to the dollar today,  down 11 percent this year.

     www.CentralBankNews.info

This week in monetary policy: Serbia, Israel, Argentina, Peru and Singapore

    This week - October 7 through October 13 - central banks from 5 countries or jurisdictions are scheduled to decide on monetary policy: Serbia, Israel, Argentina, Peru and Singapore.
    Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, the rate one year ago, and the country’s MSCI classification.

    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

WEEK 41
OCT 7 - OCT 13, 2018:
COUNTRY	DATE	RATE	LATEST	YTD	1 YR AGO
SERBIA	8-Oct	3.00%	0	-50	3.50%
ISRAEL	8-Oct	0.10%	0	0	0.10%
ARGENTINA 1)	9-Oct	n/a	n/a	n/a	27.75%
PERU	11-Oct	2.75%	0	-50	3.50%
SINGAPORE	12-Oct	n/a	n/a	n/a	n/a
1) From Oct. 1 Leliq rate changes daily

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Argentina launches new policy with 500 bps rate hike

     Argentina's central bank launched its new monetary policy framework by raising its Leliq policy rate by another 500 basis points to 65.0 percent in a determined effort to stamp out inflation that is expected to remain high in coming months as the recent fall in the peso boosts import prices.
      As part of the revised agreement between Argentina's government and the International Monetary Fund (IMF), the Central Bank of the Argentine Republic (BCRA) scrapped its inflation targeting regime and replaced it with a target of zero growth in nominal terms in the monthly average of the monetary base from October 1 until June 2019.
     On Friday, when BCRA's monetary policy committee (Copom) began implementing its new monetary policy, the rate on Leliq 7-day liquidity notes rose to 65 percent from 60 percent. On Aug. 30 the Leliq rate was raised 150 bps to 60 percent under its defunct inflation targeting regime.
     To reinforce the contractive nature of its new policy and prepare for the elimination of the stock of 35-day Lebac notes, BCRA also raised the reserve requirement for major banks by a further 300 basis points to what local media reported as 44 percent. The requirement has been raised several times in recent months.
      The central bank's new policy framework includes limited intervention in the foreign exchange, mainly to prevent excessive fluctuations in the peso. In Argentina the exchange rate of the peso plays a major role in determining inflation expectations.
     "This measure we are taking implies a significant monetary contraction that is necessary to recover nominal stability and reduce inflation expectations," new BCRA Governor Guido Sandleris said in his inaugural press conference on Sept. 26.
     Sandleris, who has worked for the Minneapolis Federal Reserve, Chile's central bank and the International Monetary Fund (IMF), replaced Luis Caputo as the third central bank president since Mauricio Macri won the presidential election in December 2015.
      Under Federico Sturzenegger, the first governor under Macri, BCRA in September 2016 formally adopted an inflation targeting regime, a system used by most central banks worldwide.
      But Sandleris acknowledged Macri's government had made mistakes by underestimating the difficulty of correcting past imbalances and the inflation targeting regime had not led to lower inflation, the central bank's primary objective.
      Argentina's inflation rate has risen steadily this year but remains below 40.5 percent that was set in April 2016. In the following months and throughout 2017, inflation decelerated.
       But this trend came to an abrupt halt but in May this year as the peso plunged, setting the stage for the US$50 billion, 3-year support agreement with the IMF in June.
     Argentina's inflation rate accelerated to 34.4 percent in August and BCRA expects it to exceed 40 percent in coming months as prices continue to adjust to the fall in the peso in August.
      BCRA picked the monetary base - the sum of all currency in circulation and banks' deposits with the central bank - as its new nominal anchor because this monetary aggregate is its most direct control and therefore strengthens its commitment to comply with the goal.
      Targeting the monetary base implies a significant monetary contraction as it recently has been growing a bit over 2.0 percent a month and now will no longer grow. With inflation continuing to rise, it will lead to a strong contraction in the monetary base in real terms.
       Data on the monetary base is published daily so Sandleris said anyone can verify the central bank is living up to its commitment that the monthly average of the monetary base doesn't grow.
       During December and June, when demand for money rises, BCRA will adjust its target to avoid excessive monetary contraction.

       Although BCRA is formally using a floating exchange rate regime without intervention, it will use zones of intervention and non-intervention to provide transparency and predictability. 

      The non-intervention zone is initially set between 34 pesos and 44 pesos per U.S. dollar, with this zone adjusted 3 percent per month until end-2018. BCRA considers this range as adequate for exchange rate parity and will adjust the zone next year.

      Within this zone, BCRA will not operate in currency market but instead focus on maintaining zero growth in the monetary base through auctions of Liquidity Letters (Leliq), which means the rate will fluctuate daily.
      "The monetary policy rate is defined as the average rate resulting from these operations, calculated on a daily basis," BCRA said on Friday, adding the policy rate thus will be determined by supply and demand for liquidity, and comply with the commitment to zero growth in the base.
      If the peso depreciates beyond the upper limit of the non-intervention zone, BCRA will sell up to US$150 million a day to prevent what it describes as "unjustified fluctuations."
     The pesos purchased in such intervention will be withdrawn from circulation, reinforcing the  contraction of the monetary base.
      In the event the peso rises rapidly to less than 34 to the dollar - a sign of confidence and demand for pesos -  the central bank may buy international reserves and decide how much to sterilize these purchases according to the economy's conditions.
      "Only in the face of this signal of increased demand for money, can BCRA increase the monetary base above the 0% growth target, which will be supported by the increase in reserves," BCRA said.
      In light of Argentina's commitment to stronger reform measures, the IMF on Sept. 26 increased its support of Argentina by US$7 billion to $57.1 billion through 2021 and front loaded the support so $19 billion were made available through the end of 2019 to calm fears the country couldn't meet its obligations.
      Importantly, these funds are no longer considered precautionary but will actually be used to support the government budget.
      In addition to strengthening its commitment to reduce inflation, Macri's government has undertaken to have a balanced budget by 2019, one year earlier than previously planned, and then a one percent primary budget surplus in 2020 to start reducing public debt.
      The currency market greeted the revised IMF agreement and Sandleris' arrival by selling off the peso, which ended last week at a new record low of 41.30 to the U.S. dollar.
      Today the peso firmed slightly to trade at 40.8 to the dollar and is down 54 percent this year.

     www.CentralBankNews.info

Argentina maintains rate, confirms no cuts till December

      Argentina's central bank left its monetary policy rate unchanged at a sky-high 60.0 percent, as expected by investors, and repeated its pledge that it would not lower the rate until at least December to ensure that monetary conditions maintain a tightening bias.
      The Central Bank of the Argentine Republic (BCRA) said its decision to keep the rate steady was justified by an expected rise of inflation in August and September despite the slowdown seen in July.
      In July Argentina's monthly inflation rate slowed to 3.1 percent from 3.7 percent but year-on-year the inflation rate rose to 31.2 percent from 29.5 percent in June with the central bank saying prices in August would be affected by an increase in regulated prices while inflation in September would be affected by the exchange rate volatility that was seen at the end of August.
       BCRA said the fall in the peso's exchange rate at the end of August will affect prices more than previously expected and therefore delay the decline in inflation.
      The BCRA has raised its policy rate by 31.25 percentage points since late April when it changed course and began raising rates to defend the tumbling peso and curb soaring inflation.
      The last rate hike was on August 30 when the key rate was raised 150 points at the second unscheduled meeting by the central bank's monetary policy committee, known as Copom.
      Argentina's inflation is accelerating due to a lethal cocktail of higher regulated price, as the government of Mauricio Macri tries to undo years of heavy government subsidies and regulation, while it faces higher import prices and thus rising consumer prices from a plunge in the exchange rate of the peso which raises import prices.
      Government cuts to electricity, water, gas and transportation subsidies, along with lower infrastructure and housing spending, is starting to pay off, with the primary fiscal deficit down almost 27 percent in the first half of the year to 106 billion pesos, or 0.8 percent of Gross Domestic Product from last year.
      In the first seven months of this year, the primary deficit amounted to 0.9 percent of GDP for a 0.7 percent annual decline, BCRA said.
      As part of a deal with the International Monetary Fund in June, the target for the primary fiscal deficit was lowered to 1.3 percent of GDP in 2019 from 2.2 percent.
      In its policy statement, BCRA said Argentina's finance ministry had announced even more stringent fiscal targets than those agreed with the IMF in June.
       For 2019 the target for the primary fiscal deficit was confirmed at 1.3 percent while the 2020 target was set at a surplus of 1.0% of GDP compared with an earlier target of a balanced budget.
      "This fiscal policy constitutes a contribution to lower inflation in coming months," the central bank said.
      But Argentina is still saddled with debt from years of excess government spending and the government debt to GDP ratio has been rising steadily in the last six years to hit 57.1 percent of GDP in 2017 from 53.6 percent in 2016.
      On top of rising inflation, Argentina's economy is slowing and the central bank said the economy is expected to shrink this year and then remain at an unchanged level in 2019.
      Argentina's peso, which has been depreciated steadily this year, took a sharp tumble at the end of August and was trading at 37.95 to the U.S. dollar today, down 51 percent since the start of 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 were 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.
      Argentina is currently in talks with the IMF about speeding up financial support.

      www.CentralBankNews.info

     

This week in monetary policy: Argentina, euro area, UK, Turkey, Peru and Russia

     This week - September 9 through September 15 - central banks from 6 countries or jurisdictions are scheduled to decide on monetary policy: Argentina, the euro area, United Kingdom, Turkey, Peru and Russia.

     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, the rate one year ago, and the country’s MSCI classification.

     The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

WEEK 37
SEPT 9 - SEPT 15, 2018:
COUNTRY	DATE	RATE	LATEST	YTD	1 YR AGO
ARGENTINA	11-Sep	60.00%	150	3125	26.25%
EURO AREA	13-Sep	0.00%	0	0	0.00%
UNITED KINGDOM	13-Sep	0.75%	25	25	0.25%
TURKEY	13-Sep	17.75%	0	975	8.00%
PERU	13-Sep	2.75%	0	-50	3.50%
RUSSIA	14-Sep	7.25%	0	-50	8.50%

    www.CentralBankNews.info

Argentina hikes rate 150 bps, pledges no cuts until Dec

      Argentina's central bank continued to tighten its monetary policy stance after the peso tumbled to new record lows, raising its benchmark rate for the fifth time this year and for the second time this month.
      The Central Bank of the Argentine Republic (BCRA) raised its monetary policy rate by another 150 basis points to a sky-high 60.0 percent and has now raised the rate by 31.25 percentage points since late April when it changed course and began raising rates to shore up the peso and curb soaring inflation.
       In its second unscheduled meeting this month, the bank's monetary policy committee said it was raising the rate today in response to the current exchange rate situation and the risk this would have a greater impact on inflation.
       The peso hit a record low of 41.3 to the dollar earlier today but then rose in response to the rate hike and was trading at 38.7 late today, down 52 percent this year.
       To guarantee that monetary conditions maintain their contractionary bias, the newly-established committee, known as Copom, pledged not the lower the policy rate until at least December.
      On Aug. 13, when the key rate was raised 500 basis points to 45.0 percent, Copom pledged not the cut the rate at least until October.
       To help reduce liquidity in the money markets, the central bank also raised its reserve requirement for all peso deposits by financial institutions for the fourth time this year. The reserve requirement for both sight and term deposits was raised 500 basis points and is now 34 percent.
      Argentina's inflation rate rose to 31.20 percent in July from 29.5 percent in June.
      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.

     www.CentralBankNews.info

Argentina maintains rate, contractionary monetary bias

      Argentina's central bank left its monetary policy rate at 40.0 percent and said it would maintain the current contractionary bias of monetary policy until the trajectory of inflation, and inflation expectations, are aligned with the goal lowering inflation to 17 percent by December 2019.
      Today's policy decision and guidance by the Central Bank of the Argentine Republic (BCRA) is the first since former Finance Minister Luis Caputo took over as governor from Federico Sturzenegger, who resigned on June 14.
       The central bank has kept its policy rate at 40 percent since early May following three sharp rate hikes in 12 days, raising it by 12.75 percentage points since April 27.
      Since Sturzenegger's resignation, in the wake of the U.S. Federal Reserve's more hawkish posture and the International Monetary Fund's (IMF) US$50 billion support package, the rout in the peso has come to a halt and the exchange rate has stabilized in recent days.
      Today's guidance by the central bank is slightly more specific than its previous policy statement from June 12 when it also said it would maintain the current contractionary bias but did not include the goal of lowering inflation to 17 percent by December 2019.
       As part of the agreement with the IMF, new inflation targets have been set and a new central bank law will strengthen the operational and financial autonomy of the central bank.
       Before the next monetary policy decision on July 10, BCRA said further changes to the monetary policy framework would be announced while the central bank will continue to intervene in the secondary market for short-term peso debt (LEBAC) to reinforce the monetary policy signal.
       For 2018 the central bank has eliminated its previous inflation target of 15 percent and replaced it with a target that aims for inflation below 22 percent for the second quarter of 2019, the first 12-month period that will be judged under the new policy framework.
       For 2019 the central bank will now target inflation of 17 percent, up from the 10 percent that was set last December.
       For 2020 inflation of 13 percent will be targeted, up from 5 percent, and for 2021 inflation of 9 percent will be targeted. By 2022 the central bank is targeting inflation of 5 percent, its estimate of price stability.
       Argentina's inflation rate rose to 26.3 percent in May from 25.5 percent in April, partly reflecting the depreciation of the peso, and the central bank said the current outlook for inflation continues to call for a contractionary bias of monetary policy.
       Market expectations for inflation remain above the 2019 inflation target and the central bank acknowledged the risk of higher-than-expected inflation from a larger-than-expected transfer of the exchange rate to retail prices. 
       The peso was trading at 27.08 to the U.S. dollar today, up 4.7 percent since a low of 28.35 on June 15 but still down 31 percent since the start of 2018.
       BCRA also said economic activity up to March had been good but data for April and May show a deceleration, partly due to the income effect of higher inflation.
       Argentina's agricultural sector is also suffering from extraordinary drought and BCRA said it may take a few more months for the economy to regain its "previous vigor."
        It estimates growth slowing to close to 1 percent in 2018 before improving in 2019.
       The IMF forecast 2018 growth of 0.4 percent, down from 2.9 percent in 2017. In 2019 growth is forecast to improve to 1.5 percent and then to 2.5 percent in 2020.
       Inflation is seen ending this year at 27 percent, then 17 percent in 2019 and 13 percent in 2020.
      
       www.CentralBankNews.info

Argentina maintains rate, tight policy until inflation falls

       Argentina's central bank left its monetary policy rate at 40.0% and confirmed its guidance from last week's agreement with the IMF that it is "committed to maintaining the current contractionary bias of monetary policy until it observes tangible signs that both inflation and inflation expectations begin to fall."
       But as part of a normalization of monetary policy, the Central Bank of the Argentina Republic (BCRA) said it was reducing the width of its corridor for 7-day passes to 600 basis points from 1,400 points, and the 1-day pass width to 1,000 points from 2,900 points.
       This means that rate for 7-day active passes is 43.0 percent and 37.0 percent for passive passes, and 45 percent for active 1-day passes and 35 percent for passive passes, BCRA added.
       In today's policy statement, the Argentine central bank reiterated key points of the June 7 agreement with the International Monetary Fund (IMF) that included a US$50 billion standby loan.
       The agreement  deepens the central bank's operational and financial autonomy, ratifies the inflation targeting regime with a floating exchange rate regime and sets new inflation targets.
       The central bank said "changes in the international scenario" - a reference to higher U.S. rates and a U.S. dollar - along with the process of fiscal transition led to a depreciation of the peso, which prevented compliance with the inflation targets.
       This necessitated a "redefinition" of inflation targets for coming years, the central bank said, adding it considers these new targets to be appropriate, given the starting point and a new context, "but at the same time they have to be very strict in terms of monetary policy."
       The reference to "strict" monetary policy implies that it won't repeat January's mistake of cutting interest rates in the face of rising inflation, only weeks after the government eased inflation targets.
      On Dec. 28, 2017 Macri's government pushed back the 2018 target of 8-12 percent inflation and set 15 percent as a target after inflation averaged almost 25 percent in 2017, well above the target of 12-17 percent target.
      But instead of treating the new targets as an acknowledgment of its failure to reach earlier targets, the central bank acted as if its credit card limit had been raised and went on a shopping spree.
      Within the next two weeks the policy rate was cut in two steps by a total of 150 basis points, unnerving many investors and accelerating the drop in the peso's exchange rate.
      This kickstarted the chain of events that led to this week's agreement with the IMF.
      For 2018 the central bank has eliminated its previous inflation target of 15 percent and replaced it with a target that aims for inflation below 22 percent for the second quarter of 2019, the first 12-month period that will be judged under the new policy framework.
       For 2019 the central bank will now target inflation of 17 percent, up from the 10 percent that was set last December.
       For 2020 inflation of 13 percent will be targeted, up from 5 percent, and for 2021 inflation of 9 percent will be targeted. By 2022 the central bank is targeting inflation of 5 percent, its estimate of price stability.
       In April Argentina's headline inflation rate was steady at 25.6 percent and the central bank said May inflation may show a lower-than-expected number, mainly due to lower regulated prices.
       However, high frequency indicators show an acceleration of inflation in June and inflation expectations for 2018 have risen to 27.1 percent from 22 percent for overall inflation.
       Meeting these new goals will be easier under the new monetary policy regime, the central bank said, adding it will be guided by how compatible the path of inflation is at the end of each quarter in relation to its new targets.
       As part of the agreement with the IMF, Argentina's government will prepare a reform of the central bank's charter from 2012 that aims to strengthen its financial and institutional independence while also requiring it to become more transparent in the way it presents its balance sheet.
       "In order to achieve the objectives of the BCRA, it is essential that the credibility of the monetary authority allows institutions and the population in general to trust that their decisions are credible and stable in the medium and long term," the agreement said.
       In order to strengthen its independence, the proposed bill will set strict limits on the reasons why the president, the vice president and directors of BCRA can be removed.
       To give the BCRA more financial independence, the reform will eliminate any financial assistance from BCRA to the Argentine treasury and the treasury will cancel its debt with the central bank of around US$25 billion.
       "This scheme, in which the Central Bank does not transfer peso to the Treasury and in which it cancels its debts with the BCRA constitutes a radical change in the monetary history of Argentina," the central bank said last week.
      As far as the central bank's overall operational framework, the BCRA said it would ratify a regime of inflation targeting with a floating exchange rate, a regime widely used by central banks in both developed and emerging economies since the 1990s.
      "This regime has proved effective internationally to anchor inflation expectations, thus maintaining low inflation and reducing the transfer to prices of exchange rate movements, allowing the real exchange rate to change to stabilize growth," BCRA said.
      Emerging countries that adopted a system of floating exchange rates instead of fixed or flexible exchange rates, or even monetary aggregates, "had greater decreases in inflation will less volatility," the central bank added.
       The Argentine peso was trading at 25.7 to the U.S. dollar today, down 27.6 percent this year and down 38 percent since the start of 2017.

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