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Decisions taken by the Monetary Policy Council

Buenos Aires, February 28, 2019. The Monetary Policy Council (COPOM) of the BCRA has decided to provide further information on the development of the monetary scheme for March and the coming months.

The BCRA continues to overcomply with the Monetary Base (MB) target. As already forecasted in the previous COPOM’s release, February witnessed a seasonal drop in the demand for foreign currency following the peak recorded in January. Foreign currency purchases by the BCRA (USD418 million) increased the MB target set for February by ARS12.6 billion, and that for the following months by ARS15.7 billion. The MB monthly average as of February 27 totaled ARS1,341 billion in year to date terms, down ARS43 billion against the ARS1,384 billion target (around 3%).

The average rate on LELIQs was more volatile than in previous months but, as anticipated upon the launch of the current monetary scheme, fluctuations in the interest rate are to be expected in a scheme of monetary aggregates like this one. There was a significant slide in the benchmark interest rate in early February, which was accelerated by capital inflow from abroad. On February 8, the BCRA decided (Communication A 6647) that financial institutions' holding of LELIQs would be limited to the deposits received or to their regulatory capital (RPC). In practice, this is meant to be a limit to financial institutions' position in liabilities of the BCRA for very short-term foreign capital flows. The BCRA believes that the decision taken prevents unnecessary risks in the future; in the short term, this measure has partially reversed a drop in the benchmark interest rate.

Despite the anti-inflationary bias of the monetary policy, inflation remains high. This scheme—based on nominal monetary aggregates—immediately reinforces its contractionary bias in light of price increase given that the real value of the MB target goes down. Nevertheless, the COPOM deems necessary to keep on reinforcing this bias. The monetary policy has shown some lag so far, but the following measures are aimed at mitigating the impact of the short-term inflation dynamics on inflation expectations.

Firstly, the COPOM has decided to keep February’s overcompliance figure through May. The MB target is thus reduced by ARS43 billion between March and May. This means that the new MB target will neutralize half of the seasonal increase of ARS80 billion recorded in December 2018. The other half (excluding the expansion caused by purchases of foreign currency) is, anyhow, significantly lower than the average increase in currency in circulation observed since December which amounts to ARS70 billion. The COPOM holds that a portion of this increase is due to a rise in the transaction demand for money, which is hardly sensitive to the interest rate.

Secondly, the COPOM has decided to become more cautious about expanding the MB if the BCRA has to intervene in March—i.e., if the exchange rate lies outside the non-intervention range. Intervention would occur:

- If the foreign exchange rate were below the non-intervention range. In this case, the monetary base target would be adjusted upwards as a result of purchases of US dollars through BCRA's auctions. Auction volumes will amount, as a maximum, to USD50 million a day, and to 2% of March’s MB target (ARS1,344 billion) on a monthly basis.

- If the foreign exchange rate were above the non-intervention range. In this case, the monetary base target would be adjusted downwards as a result of sales of US dollars through BCRA's auctions. In order to maximize the impact on liquidity, the BCRA may auction up to USD150 million daily, as established in the monetary scheme.

The BCRA’s core mission is to reduce inflation, which is still very high. The COPOM believes that a strict control of monetary aggregates will help achieve such goal. Determination and monetary discipline are of the essence to reduce inflation, and the COPOM is prepared to keep this contractionary bias for as long as is necessary.

The measures described here have been adopted with the unanimous approval of all COPOM members. The COPOM is composed of Guido Sandleris, Governor; Gustavo Cañonero, Deputy Governor; Verónica Rappoport, Alternate Deputy Governor; Enrique Szewach, member of the Board appointed by the Board of this Central Bank; and Mauro Alessandro, Economic Research Deputy General Manager.


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