Argentina is failing on forward guidance

Argentina is failing on forward guidance

The Bank of England recently released a working paper on how to make monetary policy decisions easier to understand. It finds it all comes down to communication (and, of course, infographics).

Long gone are the days where central banks “leave [its] actions to explain [its] policy”, as one former BOE Deputy Governor put it in the 1930s. Instead we now live in a time of forward guidance, where central banks constantly update the public about its views on the economy and the direction of future interest rates. In former Fed Chair Janet Yellen's words, "the explanation is the policy”.

Argentina's central bank has not yet taken heed.

We recently saw a flurry of monetary moves from the Banco Central de la República Argentina (BCRA), as authorities attempted to shore up the peso in the face of Turkey’s spiralling currency crisis, with little explanation or longer-term guidance. The central bank surprised investors for the fourth time this year, and unexpectedly raised its benchmark interest rate just over a week ago. It now sits at 45 per cent, among the world’s highest, and will remain there until October at the earliest. For Carlos de Sousa, a senior economist at Oxford Economics, the move does not inspire confidence:
" An unscheduled 500 bps rate hike without a press conference in the middle of an EM rout sends an unnecessary sign of desperation to the markets".

And on the same day, the central bank announced another major change. The BCRA said that by the end of the year, it aims to eliminate its remaining $21bn of short-term, peso-denominated notes called Lebacs and replace them with Treasury bills. It also prohibited banks from subscribing to future auctions and said that only the one-year, fixed-rate central bank notes called Nobacs and seven-day liquidity bills would be on offer to them.

The IMF has long supported this unwinding — given the peso’s volatility each time the rollover deadline approaches — so the move itself isn't surprising. But the pace is faster than the original plan and it is not without risks. If banks and other financial firms choose to dollarise their portfolios instead of reinvesting their assets in local securities, the peso would see an immediate depreciation.

The BCRA has already had to grapple with banks shying away from longer-term debt. Last week, they passed on competitively bidding for one-year, peso-denominated notes, leading the central bank to void the auction and lift reserve requirements three percentage points. Again, this was announced in a three-paragraph press release on its website.

De Sousa concedes that the central bank's decisions are the right ones as they help to stabilise the peso, tame runaway inflation and manage the country's growing debt burden. Plus, the country has made considerable headway on shrinking the fiscal deficit, an important condition of the IMF's loan package. However, as long as emergency measures go unexplained, De Sousa says, it sends a far different signal:

"If you are a global investor who is not spending 80 per cent of your day looking at Argentina, you start to think that maybe things are worse". es un sitio web oficial del Gobierno Argentino