The Central Bank of Argentina (BCRA) has been implementing a new monetary policy scheme since October 1st, 2018. This new scheme is aimed at lowering inflation and will contribute towards the restoration of a nominal anchor for the economy.
In particular, the BCRA undertakes not to raise the monetary base until June 2019. This target brings about a significant monetary contraction; while the monetary base increased by over 2% monthly in the past few months, it will stop rising from now onwards. Then, the monetary base will dramatically shrink in real terms in the following months.
The BCRA has chosen the monetary base as it is the aggregate it holds a grip on. The commitment on the monetary target is thus reaffirmed. The monetary base targeting will be seasonally adjusted in December and June, when demand for money is higher. Should seasonal factors not be removed, there would be excessive monetary contraction.
The monetary target is achieved by conducting daily transactions of Liquidity Bills (LELIQs) with banks. In addition, this target may be reached by adjusting minimum liquidity requirements. Meanwhile, the BCRA will continue sticking to the schedule to redeem LEBAC bills.
As the amount of money is exogenously determined, the interest rate on LELIQs is set by the supply and demand of liquidity, which will enable to move in the direction of zero nominal growth in the monetary base. Anyway, the BCRA undertakes to keep the minimum rate on LELIQs at 60% until inflation deceleration becomes evident. Where rates are determined in LELIQs auctions they are likely to show greater variability, but this variation would not necessarily entail a change in deposit and lending rates within the financial system.
The monetary target is supplemented with foreign exchange intervention and non-intervention measures. Initially, the BCRA would not intervene in the foreign exchange market if the exchange rate was between ARS34 and ARS44. This range is adjusted daily at a 3% monthly rate until the end of the year, and will be readjusted at the beginning of next year. The BCRA will allow free currency floating within this range, considering it to be adequate.
If the exchange rate climbs above the non-intervention range, the BCRA will sell foreign currency for up to 150 million dollars daily. These sales will not be sterilized, thus resulting in an additional contraction of the monetary base, which will tend towards correcting excessive depreciation.
If the exchange rate is below the non-intervention range, the BCRA will be able to purchase foreign currency. Only in this case with an increased demand for currency the monetary authority may decide to expand the monetary base backed by a rise in reserves.
The BCRA believes that this new scheme of intervention and non-intervention ranges adequately combines the advantages of free exchange rate floating with those of avoiding excessive exchange rate fluctuations in an economy with a shallow financial market in which the exchange rate plays an important role in defining inflation expectations.
Finally, the new monetary policy is consistent with the targets of primary fiscal balance for 2019 and of surplus for 2020. As it has already been reported, the BCRA will no longer make transfers to the Treasury. This strengthens our commitment of achieving a decreasing inflation rate over time.
The BCRA holds that the new monetary policy scheme for the months to come will allow inflation to get down, and will let us recover price stability and predictability, for which Argentina has so much longed.
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The Board of the BCRA has created the Monetary Policy Council (COPOM), which is composed of the Governor, the Deputy Governor, the Alternate Deputy Governor, a board member appointed by the Board and the Economic Research Deputy General Manager. The Council is entrusted with powers to adopt resolutions.
The main duty of the COPOM is to determine: the number and maximum amount of monetary aggregates on which the BCRA may draw to regulate the amount of money in the economy; the number and amount of liquidity absorption instruments; the rates on repo transactions and their maturities; the other variables to be considered for implementing the monetary policy; and the rules for foreign exchange intervention.
The COPOM is composed of Guido Sandleris, Governor; Gustavo Cañonero, Deputy Governor; Verónica Rappoport, Alternate Deputy Governor; Enrique Szewach, member of the Board; and Mauro Alessandro, the Economic Research Deputy General Manager.
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Guido Sandleris presented on October 22nd the IPOMfor October 2018.
See the Presentation
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This publication is comparable to quarterly reports which are characteristic of countries with inflation target regimes. Its purpose is to communicate the perception of the BCRA about inflation dynamics and its forecast of the evolution of prices, and to openly explain the rationale behind its monetary policy decisions.
This report is published on a quarterly basis, after the release of the inflation rate for the last month of each quarter, and is presented in a press conference given by the Governor of the BCRA.
A set of data series is included in Excel, used as a basis for preparing the charts embedded in every Monetary Policy Report.
Since the implementation of the new monetary policy scheme in October 2018, a report on the evolution of the monetary base is released every fortnight.
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