Loud and Clear

ARGENTINA - In Brief 04 May 2018 by Esteban Fernandez Medrano
Today’s practically combined announcement of the Central Bank early in the morning and the follow up press conference of the "economic ministers" (Treasury Minister Dujovne and Finance Minister Caputo) intend to send a loud and clear message to the market: Despite (the anticipated) FX pressures, the government has not abandoned its objective to control inflation (even if the actual 15% target for this year seems almost unreachable at this point). The announcement of the economic ministers of accelerating this year´s reduction in the primary fiscal deficit, from 3.2% of GDP to 2.7%, and anticipating they would primarily issue local peso debt rather than dollar instruments, also supports the Central Bank anti-inflationary efforts by limiting the need to sterilize dollar denominated debt issuances.The central bank´s latest hike of the reference rate to 40%, with inflation expectations below 25%, represent very sizeable real interest rates. More so of we take into account that the monetary authority not only hiked the average rage, but also widened the active/passive spread. Overnight and seven days active repo rates are today at 57% and 47% respectively (!). These are the more relevant interest rates if a potentially disruptive event were to happen to local banks, as financial institutions might tap liquidity at such rates from the central bank, either when facing a run on their deposits or to buy dollars with leverage. But if hiking rates was not convincing enough to discourage dollar acquisitions, the BCRA additionally announced (from Monday onwards), a reduction in the bank’s allowance to hold dollars up to 10% of its net worth or liquid assets, down from previously 30...

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