The expectation of a slowdown in inflation in March has reactivated market rumors of a new lowering of the interest rate. The Minister of Economy, Luis Caputo, has assured in the last few hours that the INDEC index (CPI) which will be released this Friday will be “around 10%”, after 13.2% in February. This slight decrease would give the Central Bank room to continue reducing the yield paid to banks on repos and the remuneration for fixed-term loans, a measure that clashes with the demands of the Monetary Fund.
Although the economic team remains cautious about the direction of monetary policy, consultancies and banks are preparing for a scenario of greater liquefaction of the peso. Even before the February CPI was known, the BCRA rlast month it reduced its repo rate from 100% to 80% nominal per annum (from 8.6 to 6.8% effective monthly) and eliminated the minimum threshold of the forward rate, which reduced the premium paid by banks to savers from 110 to 70% nominal per year (from 9.16 to 5, 8% monthly), well below inflation.
The goal is to continue reducing demand for pesos and ease pressure on one of the factors that would drive inflation, before raising the exchange rate and moving forward in a “currency competition” in the face of the impossibility ofdollarizing today. economy, without sufficient reserves… “We are clean up the Central Bank’s balance sheet and when we do that, the long-term price level will decrease and, therefore, the inflation rate will decrease, cleaning up the balance is important so that this pressure does not exist,” Javier Milei told Bloomberg days ago.
Specifically, lower rates contribute to reduce the issuance of pesos to pay interest on repurchase agreements. These securities, which today replace the Leliq, went from 8.6% to 6.8% monthly of the monetary base between 11 December and 26 March, according to IERAL estimates. In this way, the Central Bank seeks to reduce the quasi-fiscal deficit – by liquefying it – and the risk that pesos in repo deposits will move towards the dollar when exchange restrictions are removed.
The problem is that lowering the reference rate also requires a reduction in the yield on fixed-term securities, since banks pay these deposits with interest on repurchase agreements and if this income were reduced they would not be able to pay a premium greater to creditors and savers. “I suppose that They will continue this trend of lowering rates, It has worked until now and we fall in love with things that work, there will be a limit to continuing to reduce the BCRA deficit (the quasi-fiscal one) and to accentuate the liquefaction”, they underlined in a private bank.
One of the main constraints is the IMF. The organization’s spokeswoman, Julie Kozack, reiterated last week that we must “continue to improve the quality of fiscal adjustment, while Monetary policy will also have to adapt to this transition“. The Fund called for positive real rates, i.e. above the level of inflation to encourage savings and demand for pesos. Some banks recognize that, if the BCRA continues to lower rates, “The risk is that these pesos pass to the dollar, it is the risk of a very strong liquefaction.”
This is not the only risk if the peso’s yield continues to fall short of inflation and currency depreciation prospects. According to former Finance Minister and director of Quantum, Daniel Marx, this policy also generates: 1) the discouragement of demand for pesos, the erosion of the purchasing power of wages and the liquefaction of debt balances in pesos, 2) a depreciation and capital outflow, 3) greater declines in economic activity, and 4) a weakening of credit demand due to the deepening recession.
In another bank they specified that “a part of the market expects a reduction in rates in the next few days, while some see a CPI for March around 10%, for us these data are very optimistic”. “To the extent that inflation continues to fall, there is room for rates to do the same, we need to see to what extent A fixed term is not profitable compared to inflation and you have to deal with the dollar of liquefied savings, without it going the other way,” said Eduardo Hecker, director of the consultancy firm Vectorial.
Source: Clarin
