Central Bank raises rates: fixed terms now yield 78%

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In the first official reaction After the acceleration of inflation, the Central Bank decided to tighten monetary policy to try to contribute to the cooling down of prices and raised the reference rate to 78% per annum. To date that rate was 75%. The market had expected a 5 percentage point increase, but the BCRA opted for a softer squeeze.

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That nominal annual rate, equal to one effective monthly rate of 6.5% and 113% per annum, it is the amount that the BCRA will pay to the banks that will purchase the Liquidity Bills, and also the amount that fixed-term deposits will henceforth receive.

The increase in interest rates is due to the fact that the Government has committed itself to the International Monetary Fund to maintain “positive rates”, ie to beat inflation. The positive rate attracts pesos to banks so they look for a yield in pesos instead of going to the foreign exchange market.

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The rate hike was due to the fact that, due to the latest inflation data known on Tuesday (6.6% was February inflation), monetary policy rates had been lower than inflation.

It would not be unusual for the BCRA to hike rates again when the March CPI is known, which aims to be equal to or even higher than February’s. Indeed, private sector projections indicate that by 2023 pIt could easily end with annual inflation above 115%.

Companies do it and individuals too. If the Central Bank achieves its objective, it should neutralize the upward pressure on alternative dollars (blue, liquid-counted, MEP) and thus reduce the intensity of the pressure that the dollar exerts on prices.

In return, by paying more for Leliqs, the BCRA ends up issuing more pesos, although it later sterilizes them again by issuing Leliqs.

Source: Clarin

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