Who ends up paying the 91% annual rate on time deposits?

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The leap of the blue dollar in the last month was so dizzying as to overshadow the significant rise in the interest rate of the fixed-term deposits, which is the same reference of the Central Bank for monetary policy.

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Between 10 and 25 April, the blue dollar rose by 29.5% and swept away expectations both in terms of exchange rates and price rises.

On the eve of April’s cost-of-living index release (forecasts project an increase of more than 7%) and when financial dollars seemed to have caught a breather, the power of the interest rate in pesos will have to demonstrate its effectiveness.

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On April 25, and with some delay in a context of exchange rate instability (that day the blue had touched 495 dollars), the Central Bank raised the reference rate from 81% to 91% per annum to increase the yield of term deposits of up to $30 million and letters of liquidity (Leliq).

This way banks start offering 91% annually (7.6% monthly or 141% cash per annum) to fixed-term depositors and the Central Bank pays the banks 91% in exchange for Leliq in an attempt to close a circle that seems indissoluble.

The financial system withdraws the pesos and passes them to the Central and a wheel is started which ends up financing the Treasury, which absorbs part of the pesos by placing bills and bonds as collateral in the assets of the Central Bank.

That circle has as its official argument that the Leliqs and the liabilities of the Central Bank (monetary base and repurchase agreements) are part of the monetary policy tool that justifies them.

The nominal amount in pesos is appallingwhich is why some experts fear what they call “snowball effect” of monetary policy.

In rough figures, the monetary base (bills in circulation and bank reserves in the BCRA) is about $5 trillion. Thus, with the Leliqs (about 10 billion dollars) and the passes (about 3 billion dollars), Central bank liabilities reach $18 billion.

A sensitive point is that the Government passes on the 13 billion dollars of Leliq and must now pay the increased interest which amounts to about a trillion pesos a month.

For the government, and for many economists, this “avalanche” is not a big deal. Also because not having established it would have implied a bigger leap in the dollar and inflationbut also because they believe that these pesos should be matched by the central bank’s dollar assets. And herein lies one of the problems.

The Argentine economy has long been characterized by having many pesos and a few dollars and this year the drought has exacerbated the picture by having about 20,000 million dollars short of agricultural exports, with which only a devaluation would effect an increase in the central bank’s dollar assets.

In government, be the vice president Cristina Kirchner as Minister of Economy Sergio Massa They resisted a devaluation and therefore at the beginning of May Centrale was faced with having negative net reserves.

It is at that point that the holding power of interest rates in pesos it starts to charge a relevant value. And it’s still unknown whether this increased firepower will have an effect.

It will be possible to verify whether fixed-term deposits with banks actually increase and whether the rate, in addition to being positive with respect to inflation, is positive. also on the rise of the blue dollar and the financial one (MEP and cash with liquidation)

The dilemma is important because the blue dollar was climbing in periodic leaps and in one year it was up 131% and the badger made him turn back with the addition that saving in dollars is a well-known feature of Argentina’s bi-monetary economy.

In other words, and when the average of the forecasts compiled by the BCRA is to 126.4% inflation this yearit is very likely that the interest rate will continue to slide backwards seeking cover from savers.

Furthermore, this is only one aspect of the currency reality of the hedging process.

To the question How do companies try to protect their assets? Experts try two answers: If they can, get dollars off the rack price ($227 the wholesaler) for anticipated imports. If not, buy linked bonds at the official dollar price (dollar-linked securities) to hedge against possible devaluations.

The search for cheap dollars or official substitutes for the dollar It has been coming for some time and it is worth remembering that on 21 June 2022, in the days preceding the resignation of the former minister Martin Guzmannthe vice president was already talking about the “import festival”.

From that time to today, the wholesale dollar has soared 84% amid a sharply benefited inflation and despite testing soybean 1 and 2 dollar and agriculture 1 (by $ 300) and that, despite the drought, the government maintained its policy of delaying the exchange rate.

The crossroads now arises because not having devalued does not dispense the population from having to suffer accelerated inflation with a drop in the purchasing power of salaries and pensions and impoverishment.

Source: Clarin

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