Argentina’s Central Bank lowered the monetary policy rate on Repos from 60% to 50%
The interest burden on interest-bearing liabilities is decreasing, following the fifth rate reduction during Javier Milei’s presidency. The monetary authority also decided to once again increase the legal reserve requirement applied to virtual wallets.
Under President Santiago Bausili’s leadership, the Argentinian Central Bank determined a new reduction in the reference monetary policy rate or Repos rate, from 60% to 50% nominal annual as of May 2nd. Thus, the effective annual rate was set at 64.82%, as reported by the Central Bank itself.
In other words, the interest-bearing liabilities issued by the Central Bank now pay a nominal rate equivalent to 4.2% per month, on Repos that are renewed daily.
The official decision responds to the drastic drop in inflation expectations for the coming months, a fact clearly reflected in the Monetary Authority’s REM expectations report. The country’s main private consulting firms also acknowledge this situation, projecting a clear deflationary scenario for 2024.
High-frequency inflation measurements are reflecting the collapse in the variation of retail prices in food and beverages. For the consulting firm LCG, the weekly variation in this sector was negative by more than 1 percentage point at the end of the fifth week of April.
Alphacast surveys also foresee a slight price decline towards the second half of last month, considering the food sector. In the same vein, economist Alberto Cavallo (the son of the former Minister of Economy) anticipated through a daily price index that inflation is already running at 5% monthly, discounting the effect of public utility tariffs.
Two main logics come into play behind the rate cut. Firstly, the drop in actual and expected inflation allows for a lower interest rate, thereby avoiding excessive returns measured in dollars. On the other hand, and more importantly, the decline in the interest rate (in a context of exchange controls) allows for the cleaning up of the Central Bank’s balance sheet and the reduction of monetary expansion on interest-bearing liabilities.
The burden of interest-bearing debt in pesos of the Central Bank is decreasing in relation to GDP, and the same is happening with the payment of their respective interests. And from the national government, the fiscal surplus achieved during the first 3 months of the year allows for the cancellation of any type of monetary financing for the Treasury.
Bausili’s Central Bank also decided to raise the reserve requirement rate applied to virtual wallets from 10% to 15%, thus it is highly likely that yields on alternatives such as Mercado Pago will decrease, in addition to the effect of the rate cut.
The aim is to create a framework of rules that generates incentives for the market to purchase Treasury bonds. This serves two very specific purposes: on the one hand, the rollover of domestic debt in pesos to longer terms, and secondly, the retention of pesos to settle Temporary Advances with the Central Bank itself (an additional way to withdraw pesos from circulation).
