The BCRA Increases Again Monetary Policy Interest Rate Due to a Shock of Commodities
The Board of the BCRA has decided today to raise the APR on 28-day liquidity bills (LELIQs) by 250 basis points, from 44.5% to 47%, which represents a 58.7% EAR.
The Board has raised the minimum limits of interest rates on time deposits—in line with the rise in the monetary policy interest rate—in order to encourage full transmission to returns on time deposits in pesos.
The new floor for individuals' 30-day time deposits up to ARS10 million is 46% APR, which represents a 57.1% EAR. For all other private sector time deposits, the minimum rate is 44%, which equals a 54.1% EAR.
Lending interest rates stand at levels compatible with the boost for investment and production, and for micro-, small-, and medium-sized enterprises (MSMEs). In addition, the BCRA will continue regulating credit access for household consumption.
The acceleration of inflation in March, compared to the previous months, is partly a consequence of an international shock which especially affected energy and food prices due to the war in Ukraine, of a rise in regulated prices of goods and services (gasoline, electricity and gas, education and prepaid medical care, among others), and of seasonal increases (particularly clothing).
Due to the temporary nature of this external supply shock, inflation is expected to start falling gradually as from April and May. In this regard, the high-frequency indicators monitored by the BCRA have evidenced a slowdown in prices so far this month.
The BCRA, together with the National Government, will use all the tools available to mitigate the second-round effects of the commodity shock on inflation.
The appropriate interest rate increase to apply will vary depending on whether it is a negative supply shock or a demand shock. This is because the objective is not to reduce demand pressure but to put a stop to the second-round effects of the initial price increase, preserve monetary and foreign exchange stability, and protect savings in pesos, avoiding incentives that would accelerate dollarization.
A rise in interest rates is necessary to reduce inflation but not sufficient. The other policies and conditions that will contribute to this joint task are the following:
- Consolidation of foreign exchange stability through international reserves accumulation.
- A declining exchange rate gap in the so-called financial dollars, indicating the perception that the fundamental macroeconomic variables have improved.
- An appropriate real multilateral exchange rate to preserve the current account surplus of the balance of payments in the coming years.
- An external debt maturity profile compatible with external balance and economic growth, after various refinancing transactions.
- A reduction of fiscal deficit, which will demand less monetary financing.
- Monetary aggregates that have returned to historical levels after the peak observed during the pandemic.
- A falling trend of the stock of the BCRA's remunerated liabilities (LELIQs and repos) in terms of GDP, as a result of lower primary issuance, and therefore lower sterilization needs; gradual convergence towards fiscal balance; and a higher demand for money due to the consolidation of a sustained growth process.
- Instruments that may cushion the effects of international price shocks, partially isolating local prices’ dynamics from international prices, such as the recently created public trust fund for wheat.
- Price and wage agreements that seek to protect the real income of the population, while avoiding the inflationary amplification of the recent external shock through the coordination of expectations.
The current interest rate rise is consistent with an evolution of the BCRA’s remunerated liabilities that would end in 2022 at lower levels compared to those of the end of 2021 in terms of GDP.
The BCRA will continue monitoring the development of prices and will consider reversing the monetary policy bias as soon as the downward trend of the inflation rate is consolidated.
April 13, 2022
