Monetary Policy Report (IPOM), October 2023

• In Argentina, economic activity shrank in the second quarter of 2023 as a result of a severe drought that mainly affected coarse grain harvest. The activity level of non-agricultural sectors remained stable against the first quarter, and formal employment kept on climbing. As regards demand, a contraction in net exports, a fall in stocks—both affected by drought—and a decline in private consumption were partially offset by investment growth.

• The drought caused a significant fall in foreign trade flows—with an estimated loss of around USD20,000 million—and in export duties, which fell by 0.6% of GDP. Since mid-July the National Government and the BCRA have adopted tax and foreign exchange measures in order to improve the trade balance, accumulate international reserves, and strengthen fiscal resources. These measures included an adjustment to the official exchange rate to ARS350/USD, the application of the tax for an inclusive and solidary Argentina (impuesto Para una Argentina Inclusiva y Solidaria, PAIS) to other goods and services imports, and changes to the Export Increase Program (Programa de Incremento Exportador, PIE).

• The inflation rate of the past few months evidenced the impact of higher financial volatility and of the measures aimed at counteracting the consequences of drought on fiscal resources and international reserves, including the adjustment of the official exchange rate. The effect on prices mainly concentrated in August and September, with a monthly average inflation of around 12%. However, inflation has shown a downward trend since the first week of September. In addition, the monthly inflation rate is expected go down significantly in October, favored by a set of measures implemented by the National Government and the BCRA.

• The BCRA changed the monetary policy interest rate to mitigate the pass-through to prices derived from a ARS350/USD exchange rate. In particular, the BCRA decided to raise the interest rate on 28-day liquidity bills (LELIQs) by 21 p.p. to reach 118% APR (209.4% EAR). The BCRA also raised the minimum interest rate on natural persons’ time deposits to an effective monthly yield of 9.7%. This measure was aimed at contributing to positive real returns on investments in domestic currency, and to financial and foreign exchange balance.

• In the coming months, the BCRA will continue calibrating its policies in a context of higher volatility in financial markets caused by the elections. As regards interest rates, the BCRA's actions will be in line with its core objective of promoting positive real returns on investments in domestic currency and favoring the accumulation of reserves. The BCRA will continue intervening in the public debt secondary markets in order to avoid excessive volatility that could jeopardize financial and foreign exchange stability. In addition, the BCRA will move in the direction of prudent management of monetary aggregates, sterilizing potential liquidity surplus in order to preserve monetary equilibrium. Finally, the BCRA will continue encouraging credit lines, especially those linked to productive development through the Credit Line for Productive

Investment (Línea de Financiamiento para la Inversión Productiva, LFIP) in order to keep on supporting economic activity expansion.

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October 9, 2023

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