Last Thursday the central bank made a firm decision to give a signal amid the financial volatility unleashed by the free dollar rise. The entity that presides Miguel Angel Pesce He decided raise the policy ratewhich moves to those of fixed term, from 81% to 91% annual nominalas an emergency measure.
This means a effective annual rate –for the compound interest generated in the reinvestment of capital and interest over twelve months– close to 140%to face inflation with positive real yields, and to discourage the search for coverage in the free dollar and in the stock parities, given the proximity of the elections.
Retaining the weights within the system is a fundamental procedure to put limits on inflation and devaluation; it’s about some 10 trillion pesos that are placed at a fixed term traditional and in a smaller amount, indexed by UVA.
But the harmful effects they are also palpable. On the one hand, the cooling of the economy, since the activity suffers if pesos are withdrawn that could go to consumption. On the other hand, the high “quasi-fiscal” cost: the banks take the money from the fixed terms and lend them to the Central Bank, which places Liquidity Bills (Leliq). With this interest rate, a Monetary Base is created -in remunerated debt- every four months only for the interest paid, at the rate of more than a trillion pesos monthly.
Manuel Oyhamburu, director of the Buenos Aires Stock Exchange Foundation, indicated that “if they raise the Monetary Policy rate to 91% it is because the inflation data for April is very complicated. With that rate, the BCRA’s liabilities will start to grow by one trillion pesos a month just for interest, but they were going to use the Leliq to pay more to retirees.”
the analyst Salvador Di Stefano calculated that “the total monetary liabilities of the Central Bank of the Argentine Republic add up to $17.8 trillion, of which 29% is the Monetary Base and 71% are Bills remunerated at a nominal rate of 81% per year, if interest is not paid and compounded, the effective rate is 119% per year. This whopping liability is reached in the Central Bank due to the recurring issuance to finance the fiscal deficit, and due to the interest generated by the debt in Leliq”.
“In order to alleviate these problems, the Government should lower the interest rate, this can only happen if inflation drops and to lower inflation it must reduce the fiscal deficit to 0. The mother of all problems is that you spend more than you take in. If we made a greater effort, and instead of reducing the deficit to 0, we would have a fiscal surplus of $2 trillion a year, the debt would stop growing, and we could repay it in 41 years, it seems like a lot, but we must bear in mind that for something is beginning”, added Di Stefano.
The financial analyst christian buteler He explained that “every measure has a cost. A gap on the way to 150% has costs, raising the rate by 10 percentage points has costs. The issue is which cost is lower and that the rest of the policies are in the same direction. Contracting monetarily with rates and issuing for the Treasury or the soybean dollar collide”.
for the economist Diego Giacomini, “raising the effective annual rate from 119% to 141% is more expectations of devaluation and inflation and it will be even higher for the dollar and inflation in the future than yesterday. In addition, it is the sincerity that the IMF does not put a dollar and that they intend to die with this exchange rate policy. Hold on.”
With monetary policy rates (Leliq) of 91% annual nominal, we are already at levels above the maximum of the government of Mauricio Macri. It must be remembered that in the midst of the run on the dollar in 2019, due to the disarmament of the Lebac (Bills from the Central Bank and predecessors of the Leliq), the monetary policy rate touched 86 percent (85.991% on September 12 of that year).
Thus, the reference interest rates returned to the highest level since the 2002 crisis. One difference with that traumatic period due to the collapse of convertibility was that the rise in Central Bank rates was due to the need to absorb liquidity for the issuance of pesos dollar purchase proceeds to the public made by the monetary institution.
It is that after reaching a record close to 4 pesos at the end of June 2002, the price of the greenback began to regress to $3.70 in July and $3.60 in August, a drop that led to the sale of foreign currency in the hands of savers and companieswhich were captured by the BCRA to thicken reserveswho were in a flat $8.8 billion in mid-August, without IMF support and in full debt default.
The monetary policy rate was raised to the highest level since July 2002
That year, the rates of Lebac reached 108% annual nominal in the average of the month of Julyaccording to him Monetary Report Of the entity. Said Letters were placed for a term even longer than that of the current Leliq: 14 days.
In August 2002 the average cost of Lebac decreased to 66% annually: while two thirds of the Bills subscriptions were made for 14 days, one third was agreed for 28 and 91 days. By October 2002, the Lebac rate had dropped to 49% annually, half that of July, just three months earlier.
In any case, there are few common points between 2019 and 2002. During the presidency of eduardo duhaldeArgentina went through a GDP drop of 10.9%, with a poverty of 54% and a record unemployment of 22% of the active population. That historic recession allowed devalue the Argentine peso by 67% (the dollar shot up from one to 4 pesos) with a inflation of “barely” 41% per year.
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