Monetary Policy Report (IPOM), July 2023

• In Argentina, economic activity posted a seasonally-adjusted growth of 0.7% during the first quarter of 2023. A drought had a temporary impact on GDP in the second quarter, but the activity of all other sectors is expected to keep on growing (GPD excluding agriculture). April´s data were as expected, posting a fall of 36.8% y.o.y. in agriculture, and a rise of 2.7% y.o.y. in all other sectors (without taxes). For the rest of the year, the domestic economy will be favored by the recovery in the agricultural sector and a boost in the mining sector.

• The inflation rate exhibited a rise in the second quarter, in a context of increased financial volatility in April, which reflected exchange rate uncertainty amplified by the effects of the drought on foreign exchange settlement and public finance. Therefore, the National Government and the BCRA adopted measures aimed at reducing financial volatility and, thus, helping to curb price acceleration. This resulted in a monthly inflation rate of 6% in June, 2.4 p.p. below April’s peak, in a context of moderation of fresh food prices.

• In a context of higher inflation, the BCRA increased the change pace of the monetary policy rate to achieve positive real returns on investments in domestic currency, thus mitigating the impact of financial volatility on the forex market dynamics and inflation expectations. This way, from mid-April, the Board of the BCRA raised the interest rate on 28-day LELIQs by 19 p.p. to reach 97% APR (154.9% EAR). The BCRA further raised the minimum interest rates paid on natural persons’ time deposits to a rate equivalent to the monetary policy rate, and tripled the deposit amount up to which this rate applies (i.e., to ARS30 million).

• The BCRA continued calibrating monetary liquidity to adjust to the macroeconomic situation. In particular, all the explanatory factors of the monetary base resulting from private and public sector transactions made a positive contribution between March and June. The net increase of liquidity during the quarter, within a context of low demand of monetary base, led to the use of sterilization instruments. Therefore, remunerated liabilities increased 0.7 p.p. in terms of GDP, and the monetary base recorded a monthly average fall of 4.4% in the second quarter, accumulating a drop of around 30% over the last twelve months to June.

• Regarding the forex exchange system, the BCRA continued adjusting the rate of crawl to keep pace with the inflation rate within the current managed floating scheme. Thus, the multilateral real exchange rate increased 0.1% (monthly average) during the second quarter, in a period in which foreign exchange flows were particularly affected by the impact of the drought. Moreover, the “Export Increase Program” was reinstated, with the aim of increasing the supply of foreign currency by boosting the settlement of soybean exports, and was extended to regional economies. Foreign currency settlement under this Program amounted to about USD5,400 million by the end of June. It is worth mentioning that the currency swap was renewed for 130,000 million yuan, for a three-year term. Besides, the procedure for increasing the amount of the activation for up to 35,000 million yuan is under way. Additionally, the BCRA introduced some regulatory changes for a more efficient allocation of foreign currency.

• The consequences of the drought, whose impact was unforeseen months ago, changed the macroeconomic scenario for this year, on which the objectives included in the Extended Fund Facility (EFF) program with the IMF were based. Technical discussions about adjusting the program accordingly extended the fifth EFF review timeline. This delay led to a mismatch in the schedule of repayments and disbursements with the multilateral lending agency. At the end of June, net payments to the IMF for an amount of USD6,922 million were made. Consequently, the BCRA’s international reserves stood at USD27,926 million by the end of this month, posting a drop of USD11,134 million in the second quarter.

• In the months to come, against a backdrop of a more complex international scenario and a severe drought that adversely affected the domestic economy, the BCRA will continue to define its policies in a dynamic and flexible manner. In terms of interest rates, the BCRA will continue calibrating the monetary policy interest rate paying special attention to the past and prospective development of the general level of prices, the level of economic activity and the forex market dynamics, in order to obtain positive real returns to consolidate foreign exchange and financial stability. In addition, the BCRA will continue trading Treasury instruments in the secondary market with the aim of reducing excessive volatility that could compromise the stability and development of the local capital market. As for the forex market, the actions taken by the BCRA will continue to be aimed at preserving adequate levels of external competitiveness and encouraging reserves accumulation through the prudent management of the current regulatory framework. Finally, the financial strategy will be to continue boosting credit intermediation, especially that linked to the productive development through the Credit Line for Productive Investment (Línea de Financiamiento para la Inversión Productiva, LFIP).

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July 14, 2023

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