Central bank loosens policy
The BCRA issues short-term notes, known as Leliqs, to determine its main policy rate. Intheory, the BCRA targets the monetary base and allows the policy rate to be determined by markets for a given money-supply target. However, amid high policy uncertainty, demand for Leliq notes has been volatile and the BCRA has also committed to establishing an interest rate floor.
The central bank's Leliq debt stock had already fallen from a peak of Ps1.3trn (US$21.9bn) on August 9th (just before the primary elections) to Ps796bn (US$14.1bn) by October 29th. A high degree of political uncertainty led to a significant drawdown of deposits (for conversion into US dollars), which in turn reduced Leliq rollover rates considerably. This decline in the BCRA's Leliq stock is expected to continue on the back of a change in regulation—effective November 1st—which prohibits banks from counting Leliq notes towards their reserve requirements for sight deposits.
However, the reduction of the Leliq debt stock—and by consequence the increase in money supply—comes in the context of a significant tightening of currency controls. The BCRA expects restricted access to foreign currency to increase the demand for pesos. To keep real rates positive it maintained the floor of the Leliq rate at 63%. Ensuring that there are positive real returns on savings during monetary expansion will be essential for keeping the black-market premium for dollars in check.
Policy changes also appear to be aimed at smoothing the political transition. The BCRA has implemented new regulations that allow banks to increase credit exposure to the public sector for a three-month period. This helps national, provincial and municipal governments to finance payments of end-of-year salaries and bonuses. The administration of the outgoing president, Mauricio Macri, has also passed an executive decree, which opens the possibility of using BCRAfunds (up to Ps400bn), in case the central government faces a financing shortfall in the remainder of 2019. These policies largely appear to be modelled around the priorities of the incoming government ofAlberto Fernández.
Impact on the forecast
Looser macroeconomic policy will impede the disinflation process. The risk of a higher than expected black-market premium for US dollars remains high.