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The Rate on Liquidity Bills (LELIQs)—40%—is the New Monetary Policy Interest Rate

Buenos Aires, August 7, 2018. With the aim of fine-tuning the monetary policy instruments, the Monetary Policy Council (COPOM) of the BCRA decided to set the 7-day liquidity bills (LELIQs) interest rate at 40% and take it as the new monetary policy interest rate. In this way, monetary authority’s decisions will be focused on an instrument with increasing operating influence in a scenario of gradual reduction of LEBAC bill stocks.

The BCRA will keep its current contractionary bias unchanged until the inflation path and expectations are aligned with the target set for 2019.

The rationale behind this monetary policy decision may be summarized as follows:

- Inflation in June accelerated more than expected, reaching a 29.5% year-on-year rate. As described in the last Monetary Policy Report, inflation acceleration was mainly due to the temporary impact of the peso depreciation in May and June. Likewise, high frequency indicators show an inflation slowdown in July, but lower than the inflation expected in the previous monetary policy decision. The baseline scenario of BCRA's forecast predicts that core inflation in August, September and October will be below July's records. However, given regulated price increases are expected in August and October, the general level of inflation in such months would also be lower than July. Although market expectations rose again in the last measurement, a decreasing evolution of core inflation is forecast for the next few months in line with the projections described above.

- As regards economic activity, both agricultural production and financial markets are expected to gradually recover. However, recent developments show that economic recovery may take more months. Therefore, economy in 2018 is expected to perform similarly to 2017, later to retake its growth trend in 2019.

- In the first half of the year, the primary fiscal deficit amounted to 0.9% of the GDP, decreasing by 1.4% with respect to the same term in 2017. This implied an over performance of 0.2% of the GDP against the fiscal target of 1.1% expected for that term. Thus, the primary deficit reduction process consolidates, going down from 3.8% of the GDP in 2017 to 2.7% this year, and to 1.3% in 2019, in the absence of BCRA’s financing to the Treasury.

- Regarding monetary aggregates, private M2 grew by 21.1% in y.o.y. terms, according to data as of August 2, which was significantly lower than the inflation registered in the last 12 months. Monetary base exhibits a y.o.y.-growing rate of 30.6%; however, it should be noted that this situation was aggravated by the changes introduced in minimum capital requirements. For this reason, the monetary authority also monitors a wide monetary base that encompasses all the BCRA's liabilities in pesos to financial institutions. This broad monetary base has increased by 27.3% in y.o.y. terms against the 31.8% peak reached on average last year.

In line with the policy decision adopted, the COPOM has admitted that—even though the baseline scenario of BCRA forecast suggests that core inflation in August, September and October will be below the one registered in July—a longer period of financial stability is needed to move away from risks of a pass-through higher than expected. In addition, the COPOM believes that decreasing public spending coupled with the BCRA’s pledge to cease financing the Treasury and its current efforts to reduce excessive liquidity in the system are likely to control inflation, but it is still early to weigh benefits in the present scenario.

The COPOM is committed to go on monitoring the performance of inflation in the coming months with a view to introducing corrective measures—if deemed necessary—to achieve its targets.

On September 11, the following monetary policy release will be delivered:

Price Monitor

 

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Jul-18

 

% m.

% y.o.y.

% m.

% y.o.y.

% m.

% y.o.y.

% m.

% y.o.y.

% m.

% y.o.y.

% m.

% y.o.y.

National CPI

2.4

25.4

2.3

25.4

2.7

25.5

2.1

26.3

3.7

29.5

n/a

n/a

Core National CPI

2.1

21.6

2.6

22.4

2.1

22.4

2.7

23.6

4.1

26.9

n/a

n/a

CPI for Greater Buenos Aires

2.6

25.5

2.5

25.6

2.6

25.6

1.9

26.4

3.9

29.5

n/a

n/a

Core CPI for Greater Buenos Aires

2.2

22.3

2.5

23.1

2.1

22.8

2.6

24.0

4.2

27.3

n/a

n/a

CPI for the City of Buenos Aires

2.6

26.3

2.1

25.4

3.0

26.5

2.3

27.2

3.7

29.8

n/a

n/a

Core CPI for the City of Buenos Aires

2.1

23.7

2.4

23.2

1.9

23.5

2.6

24.5

3.5

26.8

n/a

n/a

CPI for San Luis

2.5

25.6

2.8

25.2

2.5

25.3

2.5

26.4

4.1

30.2

n/a

n/a

CPI for Córdoba

2.5

26.8

1.7

24.8

3.1

25.8

2.1

26.7

3.2

29.5

n/a

n/a

Core CPI for Córdoba

2.0

21.2

2.2

20.8

2.4

21.5

2.2

22.1

3.7

25.1

n/a

n/a

Domestic Wholesale Price Index (IPIM)

4.8

26.3

1.9

27.5

1.8

29.2

7.5

37.7

6.5

44.1

n/a

n/a

Domestic Basic Wholesale Price Index (IPIB)

5.2

26.7

2.4

28.9

1.9

31.1

8.4

40.7

6.5

47.1

n/a

n/a

Producer Basic Price Index (IPP)

5.6

27.1

2.4

29.9

2.0

32.4

8.4

41.9

6.1

47.9

n/a

n/a

Construction Cost Index (ICC)

2.4

25.3

1.6

25.9

5.1

25.5

2.8

27.5

2.5

29.3

n/a

n/a

Construction Cost Index (ICC) - Materials

2.8

24.0

2.5

24.7

1.7

25.5

6.2

30.9

5.6

36.8

n/a

n/a

Construction Cost Index (ICC) - Labor

1.8

24.3

1.1

25.7

7.7

24.5

0.7

24.5

0.7

24.4

n/a

n/a

National CPI Market Expectations Survey (REM) - 2018

 

19.9

 

20.3

 

22.0

 

27.1

 

30.0

 

31.8

National Core CPI Market Expectations Survey (REM) - 2018

 

17.1

 

18.1

 

19.8

 

25.1

 

28.2

 

30.5

National CPI Market Expectations Survey (REM) - 2019

 

14.0

 

14.3

 

15.0

 

19.0

 

20.2

 

20.6

National Core CPI Market Expectations Survey (REM) - 2019

 

12.6

 

12.6

 

13.2

 

17.8

 

18.4

 

19.0

National CPI Market Expectations Survey (REM) - 12 months

17.6

17.8

18.2

22.2

24.2

23.7

National Core CPI Market Expectations Survey (REM) - 12 months

 

16.1

 

16.0

 

16.1

 

20.7

 

22.5

 

22.0

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