The Central Bank’s move: buying government bonds and undeniable expansion

There is a concept that I like to repeat all the time. The instruments of economic policy, whether fiscal or monetary, are judged in their necessary context and in the light of their real objectives. Not in the abstract.

Worldly Example: The hammer is not a better or worse tool in itself. It depends on the situation and the use made of it. Under water and to put a screw, it is not a good tool.

Having said that, we face a new debate in this regard. The BCRA is intervening on the secondary market for CER securities, “providing liquidity”, or buying securities for which it injects pesos. To the extent that these injected pesos, after making the related changes, should be deposited, they will be largely converted into reserves and remunerated liabilities of the BCRA. Reason why the BCRA and some colleagues argue that the operation almost naturally ends up sterilizing and that it is justified because the BCRA is the lender of last resort and is giving liquidity to the curve.

In fact, the estimates of several colleagues coincide in pointing out that the issuance for purchases of CER securities has already exceeded one billion pesos since the disarmament began. It is true that at the same time we have had a significant increase in net remunerated liabilities (of interest to them), but there has also been an expansion due to purchases of foreign currency from the private sector and an additional $ 377,000 million in temporary advances to the Treasury. . We will not ignore now that money is fungible.

Beyond the higher rate of increase in remunerated liabilities, I am interested in analyzing several other points of that statement in the light of the context and its objectives.

It is one thing to intervene once, in the face of a specific event, providing liquidity to the debt market in an indexed weight by cushioning inflation a specific shock such as holding a large position. Another is to intervene in the face of sustained and generalized disarmament, but as part of a much broader attempt to stabilize expectations, which implies that such a measure will be one more within a package that must include tax definitions and very specific monetary policies aimed at allaying fears.

And it is quite another thing to go out and buy and buy without any of that, and then end up initiating systematic swap operations so that the monetary authority can enter them to download and guarantee the rollover. The last thing is to finance the capital maturities with monetary issuance, avoiding the limits of the BCRA Organizational Letter and the Agreement with the IMF..

Ergo, there is an undeniable expansionary effect which implies that, as long as this situation persists, the growth dynamics of the monetary aggregates change.

Having said that, let’s get to the point. What is important in all of this? Because it is true that the BCRA does not have many alternatives. Is that or reshape deadlines. So let’s not get into discussions of the bad guys versus the bad guys.

The important thing here is that the financial program is KO, which is why the dynamics of monetary expansion for the second half have increased significantly. This is not a sufficient condition for a significant acceleration of inflation, it is only a necessary condition. But, if it is true that, given the context of the political crisis, the increasingly disengaged economic expectations and the new obstacles to imports, this translates into in a significant increase in the risk of a new and significant acceleration of nominality, in general, and of the local inflationary process, in particular, during the second semester. The likelihood of more disruptive cutting events has also increased.

Ergo, there is nothing to celebrate, but a lot to worry about. Meanwhile, the government should pay more attention than ever to stabilization.