Higher than expected inflation drives BCRA to announces new monetary measures

ARGENTINA - In Brief 16 Apr 2019 by Esteban Fernandez Medrano
Today, during the IPOM presentations and shortly after March CPI was published by the INDEC (with a higher than expected monthly inflation rate of 4.7%m/m and an annual rate of 54.7%y/y), the BCRA announced new measures regarding the FX band and banking regulation, in an effort to control inflation. Those announcements include the idea of using the FX rate as a nominal inflation anchor and to generate more competition among banks to raise peso CD rates. More specifically the main announcements were: To eliminate the slope of the FX Band from now to the year-end, keeping it constant at today’s level. This means to set the floor at 39.8 and a ceiling at 51.4. From now to June 30th, the BCRA would no longer buy reserves if the FX rate dropped below the band floor. The BCRA deregulated the CD market, allowing any investors to make a CD deposit at any local bank, indistinctively if that person is a client or not of that bank. Eliminating the slope of the FX band and announcing that the BCRA would not buy reserves during a time period where there will be dollar supply in the market from both the Treasury (expected to sell USD 60mn on a daily basis) and from the agricultural sector, has the clear incentive to induce a short-term appreciation of the currency (or at least to disincentive anyany further depreciation), generating an FX driven deflation in the economy to counteract the latest inflation peaks. For all practical purposes, there will be no FX flor until June 30th, besides self-regulated market movements, anticipating a potential BCRA intervention from July 1st onwards. Also the BCRA will be in no pressure to sterilize the potential dollar acquisitions making the M0 o...

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