Decisions taken by the BCRA Monetary Policy Council

Buenos Aires, January 2, 2019. EThe BCRA Monetary Policy Council decided to supply additional information on the development of the monetary scheme in January. Thus, transparency is expected to provide more predictability about management of monetary aggregates and foreign exchange intervention.

In the first quarter of the new monetary scheme, the BCRA overperformed its Monetary Base target. The Monetary Base (MB) averaged ARS1,253 billion in October and ARS1,256 billion in November. In both cases, the MB stood below the ARS1,271 billion target by ARS19 billion in October and ARS15 billion in November. The scheme forcast an increase in the MB of ARS1,351 billion in December in line with the seasonal growth in the demand for money to make paymenbts over the month. In December, the MB averaged ARS1,337 billion, showing an overperformance of ARS14 billion, an amount fairly lower than that of ARS16 billion set by the Monetary Policy Council in its previous meeting.

In the last few months, both inflation and inflation expectations have started to flag some slowdown. High frequency indicators show a downward trend in inflation.

Against the backdrop of these indicators, in December there was a recovery in the demand for money. The cash held by the public exceeded the seasonal change that was originally forecast, evidencing a reverse in the money demand fall recorded as from the nominal instability episodes witnessed in 2018.

The increase in the demand for pesos went hand in hand with the development of the foreign exchange market. In the last quarter, USD13 million were purchased per day as a store for value, the lowest amount since the removal of foreign exchange restrictions. The exchange rate reduced its volatility, both in the spot and forward markets. Given the low demand in futures markets, the BCRA did not renew the contracts previously offered, hence recording a zero-position by the end of 2018.

As a result of the increase in demand for cash, the Committee holds that the MB target set in the monetary scheme for January results in a clear contractionary bias consistently with the disinflationary trend under way. In turn, seasonal demand for cash in February and March has historically proved to be lower. Therefore, the BCRA will perform the MB in January and may even overperform its target in the next two months. The potential margin of overperformance will be announced by the BCRA at the beginning of each month in which the target is overperformed and will be calculated on the basis of the demand for cash.

EFurthermore, the BCRA will be cautious in the implementation of its foreign exchange intervention strategy. The COPOM has decided to keep the same parameters announced for December:

• - If the foreign exchange rate is below the non-intervention range, the BCRA will be able to increase the monetary base target by purchasing US dollars through auctions. These auctions will amount to, as a maximum, USD50 million a day. The total amount to be auctioned over a month may not exceed 2% of the target.
• - If the foreign exchange rate is above the non-intervention range, the BCRA will be able to shrink the monetary base target by selling US dollars through 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 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.

January 2, 2019