The Board of Directors of the Central Bank of the Republic of Argentina (BCRA) decided to keep interest rates unchanged at 118% (209% in effective annual terms, TEA).
Through a statement, the entity that manages Miguel Pesce explained that “in August, the monthly inflation rate was 12.4%, driven by the transition to the prices of increased financial volatility recorded in the second half of the month and the recalibration of the level of the official exchange rate”.
“However, the high-frequency indicators indicate a slowing of the pace of increase in the general price level from the peak in the third week of August, which will deepen in September,” he said.
He then pointed out that “the Central Bank’s interest rate policy intends to take care of positive real returns on local currency investments to preserve monetary and exchange stability”.
And he concluded by pointing out that “BCRA will continue to monitor the evolution of the general price level, the dynamics of the exchange market, and monetary aggregates for the purposes of calibrating its interest rate and liquidity management policy.”
The traditional fixed term is now losing out against inflation
Current fixed-term yields remain in negative territory when compared against inflation in August. However, this Thursday, it was confirmed that the BCRA kept the interest rate unchanged because it made its decision in anticipation of expected future inflation. And furthermore, they established that the annual effective rate of 209% is positive compared to the annual inflation rate.
Inflation in August was 12.4%, the highest in the last 32 years
In the government, they confirmed that “although inflation in August reached double digits, inflation in September was more flat,” and they attributed the cost of living last month to the specific effect of devaluation.
In this framework, they believe that with the exchange rate fixed until the end of October at $350, added to the renewal of price agreements and the freezing of public service fees, inflation in September will slow down. Therefore, they reasoned, “We will not raise the rate because a month has passed; we will wait.”
They also based their optimism on some surveys that showed a slowdown in inflation in the first week of September. Emiliano Anselmi, leader of the PPI macroeconomic team, pointed out that “despite the record inflation data for August of 12.4% and that in September it is likely to be 11%, high frequency measurements show that weekly inflation fell this Wednesday. Data came out of a private survey showing that the general rate is in the area of 1.5%, and the core inflation is 2%.
Rate: the reasons why BCRA refused to raise it
Specialists admit that in the final run-up to the election, it will not be an easy decision to raise the rate because of the cost implied by this measure in higher credit prices, the impact on economic activity, and the deterioration of the quasi-fiscal deficit.
And as the interest rate rises, the growth rate of BCRA’s liabilities will increase, which will worsen the expectation of inflation in the future and worsen the entity’s balance sheet.
“It will not moderate inflation because the rate will increase. And it will damage the BCRA balance. If the rate increases, it will be complicated by the issue of paying remunerated liabilities, and that is what it should control. unreasonable, shoot yourself in the feet,” said Menescaldi.
Eco Go shows that it has $19.8 billion in unpaid debt, a level close to the peak reached in March 2018 when it reached $20.8 billion at today’s prices.”
Lautaro Moschet, The economist from the Libertad y Progreso Foundation, emphasized that “an increase in interest rates will mean an increase in BCRA debt payments, which, therefore, will increase the quasi-fiscal deficit.”
“Now, the interest is added to almost $2 trillion per month. Approximately 20% of the monetary base.
The fixed-term rate will remain unchanged with a monthly yield of 9.7%
In the same diagnosis, the economist Federico Glustein He said that the BCRA “may not increase the rate so that it does not affect the activity” at the same time that the increase “will be dangerous in the short term” because now that it is necessary to issue a monetary base every 3 and a half months, it will be unsustainable, above all, considering that inflation may rise, and that may lead to a permanent demand for emissions and rates.
Instead, the economist Natalia Motyl He judged that due to the August inflation data, the BCRA should increase the rate from 118% TNA to “144% per year so that it remains at 12% effective per month” in line with inflation.
However, the analyst estimates that the entity, “because of the election issues, may remain stable” because the rate increase will have many harmful effects. And between collateral consequences, He highlighted the “negative impact on economic activity, which comes with difficulties due to macroinstability and the lack of availability of dollars, and the reduction of consumption.” The rate increase makes credit more expensive for families, due to the cost of bank loans and the cost paid when financing with a credit card, and for companies.
Dollar: the risk of not raising the rate
The blue dollar rose $5 on Wednesday to close at $735; this was the third consecutive increase, and it accumulated an increase of $25 for the week. Meanwhile, CCL ended at $741, an increase of 0.3%, and MEP remained stable at $676.32. Financial currencies remained calm thanks to the greater supply of currencies brought by the 4 soy dollar, which at the same time gave greater firepower to the BCRA to intervene in the financial market and keep it at bay.
But analysts predict a trend in the dollar due to changes in the Income Tax, which means an increase in the purchasing power of people who have a high salary that usually saves dollars. And also, if at the end of September it ends at 4 soybean dollars, In this context, some analysts warn that not raising the rate is “very dangerous” because it could put more pressure on the same dollar.