The Central Bank raised the monetary policy rate to 78% per year, which gives an effective rate of 113.2% per year. This implies that the nominal annual rate rose 3%, which generates a 6.2% rise in the effective annual rate.
In this context, considerations can be made about whether the measure is correct, what will happen to the price of the dollar and what are the best investments in the new scenario..
Dollar: how much can it rise in a year
The monetary liabilities of the Central Bank add up to $16.6 trillion, of which 5.3 trillion are unpaid, since it is the monetary base. Some $11.3 billion are remunerated, made up mostly of letters called Leliq.
Las reservations today they are located in US$37,718 millionthe lowest level in 2023, similar to that reached in November 2022.
The stock of remunerated monetary liabilities, which are $11.3 billionSince the Central Bank does not pay interest and is capitalized, this one-year debt is set to increase by 113.2%, not counting what the Government could issue during that period of time and rescue via Leliq.
Our hypothesis is that in one year the Government increases the monetary basis not less $3.5 trillion, $12.8 trillion in interest on monetary liabilities and the issuance of close to $2.1 trillion to purchase bonds in pesos in the market. This would give us, one year from now, monetary liabilities for $36 trillion.
The rate hike will push the dollar up.
For the dollar to remain at current levels for one year, reserves should be at US$90 billion, something that is very unlikely to happen. If the reserves were maintained at a level of US$40,000 million, the equilibrium dollar to one year would be located around the $900.
Rate hike, new boost for the dollar
The increase in the interest rate is intended to cool the economy, however, it is not taken into account that drives up the liabilities of the Central Bank, generating upward pressure on alt dollars.
The gap today is around 90%, and we should not rule out an increase in the gap to levels of 120%, taking into account that in the future the reserves will not react to the increase due to the fall in this year’s harvest . For this, an alt-dollars price target would be around $440.
It is estimated a soybean harvest of 25 million tons and corn 36 million tons. Combined, the field would take about $23 billion from the economy. This would imply a drop in exports close to 26% and a drop in GDP of around 4%, or something more.
What should invest in
The rates of the bills with a treasury discount are located above the rate set by the Central Bank. For example, a 39-day letter yields 85.3% per year. Thus, it yields 7.3% more than the monetary policy rate, which is at the same time the fixed term rate.
A one-month fixed term yields 6.5% per month, while a one-month term letter yields 7.1%. Thus, The Government seeks that investors prefer to finance the State by offering a higher rate than the traditional fixed term.
Despite the rise in rates, the fixed term remained a losing investment compared to other more sophisticated options.
A government bill with a discount that adjusts for inflation at 32 days yields 7.4% per year, which would be 0.62% per month. This implies that for an inflation-adjusted bill to equal the yield of a discount bill, inflation would have to be 6.5% per month.
The TV23 bond is a bond in pesos linked to the evolution of the wholesale dollar (linked dollar). This bond matures on April 28 and yields 10.3% per year, which would be 0.86% per month. For this bond to beat the discount letter, we should see a devaluation of the peso of 6.3% per month.
According to how the inflation of March comes and the devaluation rate of the same month, everything suggests that today the bills that adjust for inflation and the bond that adjusts for the wholesale dollar at these price levels are more attractive than the bills at a discount. From now on, the fixed term with a yield of 6.5% per month is the most losing option.
Bottom Line: Rate Hikes Help the Economy
Rate hikes don’t seem like a good idea., since it is not accompanied by fiscal and monetary measures that encourage a reduction in inflation. The rise in interest rates in this context of lack of policies that accompany this decision lead us to think that the rise will feed back into inflation and recessionwith the addition of expecting an increase in the exchange rate gap.
In conclusion, the increase in rates without complementary measures, such as a reduction in the fiscal deficit or an increase in reserve requirements, will not give results in the fight against inflation. We are entering a scenario of recession with inflation and an increase in the exchange rate gap with the objective of reaching above 100%. This implies a comfortable dollar of over $400 in the coming months and $900 a year from now. Inflation? Above 100% per year for a long time.
