------------------ ESP

The BCRA keeps its monetary policy rate at 40%

Buenos Aires, July 10th, 2018. The Central Bank of Argentina (BCRA) has decided to keep the monetary policy rate at 40%. In line with this measure, current contractionary bias will remain unchanged until the inflation path and expectations are aligned with the target set for December 2019.

The rationale behind these decisions on monetary policy is summarized as follows:

- As described in the previous release, high-frequency indicators on inflation have evidenced acceleration in June, which mirrors both the direct and indirect effects stemming from foreign exchange instability. Market expectations rose once again according to the latest measurements—partly as a result of the changes in the exchange rate recorded between late May and late June—. Yet, the latest data available have shown that inflation has slowed down as from July in line with the projections made by the Economic Research Deputy General Management Office of the BCRA. Even so, the current outlook calls for keeping a monetary policy contractionary bias.

- Economic activity continued growing as of March; however, April’s indicators reflected the direct impact of the harsh drought on soybean and corn harvests. Furthermore, the income effect of the recent inflation acceleration and the subsequent hardening of credit conditions came into play in May. The smooth operation of financial markets and the recovery of agricultural production are expected to gradually contribute to greater economic activity in the third quarter; however, recent developments show that it may even take more months to regain momentum. Consequently, GDP growth is expected to slacken in 2018 before resuming higher rates in 2019.

- Lending facilities keep moving on a balanced growth path in the face of some effects brought about by the recent exchange instability, and potential short-term consequences on economic activities. Bank loans are expected to grow more moderately in the coming months vis-a-vis previous months in line with less aggregate demand.

- In turn, June’s tax revenue rose sharply despite a slowdown in the level of activity thereby ratifying the prospect of compliance with the fiscal target that would reduce 2017 primary deficit from 3.8% of GDP to 2.7% in 2018 and to 1.3% in 2019.

- Private M2 has climbed 23.7% year-on-year, standing below inflation recorded over the past 12 months. The monetary base has increased by 31.1% year-on-year; however, such growth has been influenced by the ratios and calculation periods of minimum reserve requirements recently set out by the BCRA. Thus, the BCRA has started monitoring a broader monetary base that embraces all BCRA's liabilities to banks (net repos, liquidity bills [LELIQs] and BCRA bills [LEBACs]) and the 2020 bond of the National Treasury, also eligible to be included in minimum reserve requirements. This broad monetary base has increased by 27.6% year-on-year against the 46.9% peak it had reached in May 2017.

In line with the policy decision adopted, the Monetary Policy Council has admitted that inflation levels may be higher than expected should the exchange-rate pass-through to consumer prices exceed estimations. In addition, the Council believes that a decreasing public spending coupled with the BCRA’s pledge to cease providing finance to the Treasury, and a reduction in excess liquidity, already on the way, should contribute to bringing inflation under control. Thus, the BCRA’s authorities have undertaken to continue monitoring the inflation performance in the coming months with a view to introducing corrective measures—if deemed necessary—to achieve the inflation target.

As announced in the release dated June 26th, the new authorities have decided to make changes to the monetary policy framework. Firstly, the decision adopted aimed at reaching a one digit annual inflation rate with the interest rate as the single monetary policy instrument should be supplemented with a close monitoring of monetary aggregates. In this context, legal minimum reserve requirements have been increased twice since June 18th, 2018. The new authorities intend to gradually reduce the stock of LEBACs without raising the amount of money in circulation in order to gain a tighter control over liquidity in a general sense. Secondly, the Monetary Policy Council now plays a more active role, ceasing to be an advisory board to become a resolution board. With a view to enhancing effective communication with the public regarding the BCRA’s outlook, the result of the votes of the Council members will be included in the monetary policy releases. Additionally, monetary policy decisions are now taken on a monthly basis. This change clearly shows the BCRA's determination to adopt monetary policy decisions in line with an accurate prediction on inflation trends for the coming months. Nevertheless, in the face of high volatility as such experienced in the present time, the BCRA will participate actively in the secondary market of Central Bank bills (LEBACs). The purpose of this measure is to give the right signal about the monetary policy rate. The next monetary policy release will be issued on August 7th, 2018.

Price Monitor

 

Jan-18

Feb-18

Mar-18

Apr-18

Mar-18

Jun-18

 

% m.

% y.o.y.

% m.

% y.o.y.

% m.

% y.o.y.

% m.

% y.o.y.

% m.

% y.o.y.

% m.

% y.o.y.

National CPI

1.8

25.0

2.4

25.4

2.3

25.4

2.7

25.5

2.1

26.3

n/a

n/a

Core National CPI

1.5

21.1

2.1

21.6

2.6

22.4

2.1

22.4

2.7

23.6

n/a

n/a

CPI for Greater Buenos Aires

1.6

25.4

2.6

25.5

2.5

25.6

2.6

25.6

1.9

26.4

n/a

n/a

Core CPI for Greater Buenos Aires

1.5

21.9

2.2

22.3

2.5

23.1

2.1

22.8

2.6

24.0

n/a

n/a

CPI for the City of Buenos Aires

1.6

25.8

2.6

26.3

2.1

25.4

3.0

26.5

2.1

26.9

n/a

n/a

Core CPI for the City of Buenos Aires

1.7

23.1

2.1

23.7

2.4

23.2

1.9

23.5

2.6

24.5

n/a

n/a

CPI for San Luis

1.4

24.6

2.5

25.6

2.8

25.2

2.5

25.3

2.5

26.4

n/a

n/a

CPI for Cordoba

2.3

26.6

2.5

26.8

1.7

24.8

3.1

25.8

2.1

26.7

n/a

n/a

Core CPI for Cordoba

1.6

20.3

2.0

21.2

2.2

20.8

2.4

21.5

2.2

22.1

n/a

n/a

Domestic Wholesale Price Index (IPIM)

4.6

22.4

4.8

26.3

1.9

27.5

1.8

29.2

7.5

37.7

n/a

n/a

Domestic Basic Wholesale Price Index (IPIB)

4.9

21.8

5.2

26.5

2.4

28.7

1.9

30.9

8.4

40.7

n/a

n/a

Producer Basic Price Index (IPP)

5.0

21.6

5.6

27.0

2.4

29.8

2.0

32.3

8.4

41.9

n/a

n/a

Construction Cost Index (ICC)

1.2

24.6

2.4

25.4

1.6

26.1

4.9

25.4

2.7

27.4

n/a

n/a

Construction Cost Index (ICC) - Materials

2.4

22.6

2.8

24.0

2.5

24.7

1.7

25.5

6.2

30.9

n/a

n/a

Construction Cost Index (ICC) - Labor

0.2

22.3

1.8

24.4

1.2

25.9

7.3

24.3

0.7

24.3

n/a

n/a

National CPI - Market Expectations Survey (REM) - 2018

 

19.4

 

19.9

 

20.3

 

22.0

 

27.1

 

30.0

National Core CPI - Market Expectations Survey (REM) - 2018

 

16.9

 

17.1

 

18.1

 

19.8

 

25.1

 

28.2

National CPI - Market Expectations Survey (REM) - 2018

 

13.5

 

14.0

 

14.3

 

15.0

 

19.0

 

20.2

National Core CPI - Market Expectations Survey (REM) - 2018

 

12.0

 

12.6

 

12.6

 

13.2

 

17.8

 

18.4

National CPI - Market Expectations Survey (REM) - 12 months

18.6

17.6

17.8

18.2

22.2

24.2

National Core CPI - Market Expectations Survey (REM) - 12 months

 

16.5

 

16.1

 

16.0

 

16.1

 

20.7

 

22.5

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