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Summary of Argentina: BCRA Tightens Monetary Policy Further

Core Content

The document outlines the recent tightening of monetary policy by the Argentine Central Bank (BCRA) under its new leadership, following the replacement of Governor Federico Sturzenegger with Luis Caputo. This shift is driven by the need to control inflation and stabilize the economy, in line with a new agreement with the International Monetary Fund (IMF). The BCRA has implemented several measures to restrict liquidity and has signaled a likely increase in the policy rate.

Main Points

1. Monetary Policy Tightening

• The BCRA has taken additional steps to tighten liquidity, including raising banks' mandatory reserve requirements by 3 percentage points and an additional 2 percentage points around mid-July.
• These measures have contributed to an increase in short-term interest rates.
• The central bank is expected to raise the policy rate to 43% next week, a 300 basis point increase.

2. Inflation Targets and Bands

• The IMF agreement has set inflation targets for Argentina, with a 27% target for 2018 and a 17% target for 2019.
• Inner and outer bands are established around these targets:
  • Inner band ceiling: 29% for 2018
  • Outer band ceiling: 32% for 2018
• If inflation exceeds these bands, the BCRA will need to consult with the IMF staff and the executive board to determine the appropriate policy response.

3. Monetary Base and FX Management

• The expected evolution of the monetary base (M0) is consistent with the inflation targets:
  • Q3 2018: 39.5% y/y increase
  • End-2018: Moderation to 31% y/y
  • Mid-2019: Further moderation to 19% y/y
• The IMF agreement also sets NIR (Net International Reserves) targets, limiting the BCRA's ability to intervene in foreign exchange markets.
• The NIR target for June 2018 is USD 5.5bn, with USD 9.5bn available from the original USD 15bn disbursement.
• The NIR target for June 2019 is USD 7.5bn.

4. FX Auctions and Treasury Actions

• The Treasury will begin conducting daily FX sales this week using IMF disbursements to fund peso needs.
• These sales will be carried out through FX auctions, which are expected to become a new format for central bank interventions.
• A regulation introducing FX auctions is expected to be announced before the end of June.

5. Elimination of Fiscal Deficit Financing

• The BCRA has stopped financing the fiscal deficit as of 7 June 2018.
• This decision is part of efforts to increase operational autonomy and reduce the quasi-fiscal deficit.
• A new BCRA charter will be submitted to Congress by March 2019, reflecting this change and applying international accounting standards to the central bank's balance sheet.

6. Reduction of Lebac Stock

• The BCRA is reducing its Lebac (Ley de Bonos de la República Argentina) stock, which has been a major contributor to the quasi-fiscal deficit.
• The goal is to reduce BCRA's net claim on the government by at least USD 25bn by May 2021.
• The first IOU repurchase took place this week, with the Treasury pre-paying ARS 67.5bn of IOUs using bond issuance proceeds.

7. Quasi-Fiscal Deficit

• The quasi-fiscal deficit, primarily driven by interest payments on Lebacs, reached nearly 2% of GDP in 2017.
• With the reduction in Lebac stock, the quasi-fiscal deficit is expected to be capped at 0.8% of GDP for H1 2018.

Key Information

• The BCRA's new team is implementing restrictive measures to control inflation and stabilize the economy.
• IMF targets are binding and include both inflation and foreign exchange management.
• FX auctions are becoming a new tool for the BCRA to manage liquidity and currency.
• Eliminating fiscal deficit financing is a structural change aimed at improving central bank autonomy.
• The reduction of Lebac stock is expected to significantly limit the quasi-fiscal deficit and simplify monetary operations.
• The first IOU repurchase has already occurred, signaling the start of this process.

Conclusion

The BCRA is adopting a more restrictive monetary policy stance to meet its inflation targets and improve fiscal and monetary discipline. These measures include raising reserve requirements, limiting FX intervention, and reducing Lebac stock. The central bank is also transitioning to a new operational model with FX auctions as a key component. The overall strategy aims to restore market confidence and ensure long-term economic stability.