Message to the Central Bank: Raise the bill, not like that!

If we tell a Martian that the Central Bank has raised the interest rate of monetary policy (POLMON, the BCRA’s accrued payable liability, simplified) five times since the beginning of the year, he is loaded from 38% to 49% TNA (from 45.4% to 61.8% TEA), the Martian is likely to think we are facing a very focused on fighting inflation. Very “hawkish” in jargon.

Certainly the Martian metaphor is very useful to illustrate with wrong conclusion which can be reached when considering a decontextualized data.

What is the context?

Una. In the same period of 2022, the same BCRA raised the POLMON rate in that way is not monetarily contractive with paid liabilities earning that rate, made direct funding operations with the National Treasury extensive (by $ 150,000 million), allowed private M2 to continue to accelerate (from growth to 54.4% year-on-year at the end of 2021 to 60.8% year-on-year at the beginning of May, always taking into account the moving averages of the last 30 days) and proved a significant increase in the position of Treasury public securities in bank reserves (a monetary expansionary resource of $ 265,000 million).

If we add the past two years and seasonality, things get worse.

Over the past two years, the BCRA has generated massive monetary expansion to finance the fiscal deficit (nearly 7% GDP by direct financing to the treasury in 2020 and nearly 4% in 2021, to which 1.5% should be added indirectly to that latter. years).

In 2022, a good portion of this expansion will be concentrated by the end of the year. From time to time, the early part of the year the BCRA has a contractionary role, because due to financial needs and seasonality of demand for the peso, what is released at the end of one year is re-absorbed at the beginning of the following year. . That also didn’t happen in 2022.

Closing point. The BCRA has not been contractive in its balance despite several times the rate being raised. Unlike. The Regime used by the BCRA is hardly a rate regime, what the BCRA does with the rate does not seem to indicate its POLMON bias if we look at the balance and the aggregates.

Second. Rate increases always come after shocks that trigger inflation expectations that are high and higher than the POLMON rate in the past. In other words, all rate increases have always come from the rear.

They are not “hawkish”. Instead, they confirmed the opposite. That the BCRA “has a heavy hand” when it comes to raising the POLMON rate, even in this context of strong inflationary acceleration and inconsistency with expectations.

In particular, the inflation expectations that at the end of April and according to the BCRA itself are at 58% for the next 12 months and more than 4% monthly for the next three (in addition, they systematically correct the upward ), only now does the BCRA manage to put a POLMON rate that in both terms of comparison (TEA) is over 60% per year and approximately 4% per month. read, in the coming months it will continue to be negative and the expectation is that inflation will come down and be slightly positive (as long as the BCRA supports it) in the fourth or fifth month.

Closing point. Nonsense these homeopathic increases. If you upload it, upload it once and for all.

Third. Speech or “words” are harmful. The rate trend is backward, it still does not guarantee a positive yield on the peso amid the strong inflationary acceleration that has been happening for several months and does not represent what the BCRA is doing not only with its remaining balance sheet, but on its own. its paid liabilities, and yet, before each increase, the BCRA warns us that, if with one of those and with luck, inflation starts to slow, it will be prepared to reverse its POLMON bias. What bias? If there’s not much POLMON has reached this year, it’s contractive.

Hence, the BCRA is eager to lower the rising rate homeopathically at the earliest opportunity.

Fourth. Inflation accelerated significantly during the period in question. We are at 80% annually considered the record accumulated by the core or underlying IPC in the first quarter. High inflation is highly variable. The chance that inflation will exceed expectations will increase the higher the inflation rate. Which suggests that the greater the risk of becoming the peso and, therefore, also the premium that must be given so that the demand for the peso does not continue to worsenwhich contributes to the acceleration of inflation.

This indicates that the positive real rate that BCRA should put on the table, which it hasn’t put up until now and is eager to lower it once it has the chance, is rising in these months. We come to the opposite.

Fifth and short. BCRA forces banks to lend on different lines at lower interest rates than POLMON and even the adjustment of the Official Exchange Rate. Also, the passive rate also decreases. Read on, this is a parade of negative interest rates.

At this point in the fight, our little martian is dizzy, he can’t understand what the BCRA’s POLMON regime is, and what it wants to do with it. corso of negative interest rates in pesos that he compiled. And that’s really how we are the agents of the Argentine economy. Therefore, these rate increases are completely counterproductive. They add to the general confusion.

“Not that way!” Myrta would say. And I calculate that the rate should think of something similar in these situations and in the face of such handling.

Here is the contribution. At this point, the best the BCRA can do is define a simple monetary regime which contributes, at least, to not add more confusion. Not to continue unpinning expectations from malpractice. If you can’t help it, at least don’t make it more complicated.

That would be a simple consolidated regime, with M2 deprived of the target, corresponding to a level of monetary expansionary financing in the Treasury agreed in the agreement with the IMF and which allows the inflation rate not to exceed 80% by 2022. And let the interest rate be what it is consequently (there if it becomes positive). For everyone, including the treasury, which continues to be funded by CER (which is more expensive every day) That’s how we are.