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Thursday, March 30, 2023

BCRA debates a rate hike and the market places bets on how much it would raise

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This Tuesday the data of February inflation published by the National Institute of Statistics and Censuses (INDEC), which was 6.6%. It is a worrying fact because it is the third consecutive month of rise that is recorded and, on the other hand, reached the 102.5% year-on-year (the highest since October 1991). And, in this context, the market begins to talk about the arrival of a new increase in fixed-term rates by the Central Bank (BCRA). The main unknowns at this time are whether it will actually do so this Thursday and how much it will be.

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The truth is, since September of last year, the BCRA has not touched the yield percentage of fixed terms. On that occasion, it raised the Nominal Annual Rate (TNA) to 75% and the effective one to 107%, which guaranteed, throughout all these months, a gain for savers of 6.2% per month. Until last month, when inflation was 6%, it was still beating inflation (or losing out). But the February data broke that beneficial relationship for savers, who lost 0.6% against that index.

Already last month, at the board meeting after the inflation data for January was known, the possibility of a rate hike was discussed, with voices in favor and against on the table. Some members of that body considered that it was necessary to give a strong signal from the BCRA to control inflation. Finally, it was decided not to move in that direction, as expected in the City.

In the statement at the time, the BCRA explained that the decision was due to the fact that the monthly acceleration in the rate of increase of the CPI was explained almost entirely by increases in the Seasonal (mainly vegetables and tourism) and Regulated (especially transport, gas and communication) categories, while the core inflationwhich reflects the more trend behavior of the general price level, was located at a level similar to that of December (5.4%, +0.1 pp).

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fixed term savings

The BCRA seeks to improve the performance of savings instruments in pesos.


This month, that argument no longer applies because core inflation for February was 7.7%well above the monthly yield of the fixed term. Therefore, although -as reported by a BCRA source to Ambit– “the issue has not yet been discussed in the board of directors and decisions are made by consensus”, the truth is that it is very likely that there will be news on rates this Thursday.

Some arguments against rate hikes

However, the economist from the consultancy Invecq Juan Pablo Albornoz explains that, “if the decision of the BCRA to move or not the monetary policy rate (and also the minimum fixed term rates) were based solely on inflationary arguments, still have reasons not to upload it”.

And it is that it indicates that the monetary policy rate yields a TEA of 107%, below past inflation, which is 102.5% and, even more important, it is still above what the REM expects, which projects an average monthly inflation of 5.9% for the next 7 months and an annual inflation of 100% for 2023.

Increase in fixed term rates: how much would it rise

But, he warns that “the macro is giving very clear signs that nominality is getting out of control”, for which reason he considers that, even if the rate is a couple of basic points above the inflation expected by the REM, “not to move it, with the inflationary acceleration that is being seen and the current deterioration of the exchange panorama, it could be a wrong step.”

In the same sense, the economist from Equilibra Lorenzo Sigaut Gravina states that, “if the BCRA really wants to be aggressive, it has room to raise the rate, with a nucleus that is above 7%”. However, he contemplates the possibility that inflation in February will be established as part of a meat price readjustment shock. And it is that, according to official sources, meats accounted for 1.3 percentage points of the 0.6 of the general level, while other foods, such as vegetables, slowed down. Likewise, in the acceleration of 2.3 percentage points of the core, meats accounted for 2 points.

However, Sigaut Gravina expects that, beyond the transitory element of meat last month, “it is also expected that the price index data will be high in March.” Thus, everything indicates that the intention that was raised at the table in February by some of the members would finally materialize this month and the BCRA will rise this Thursday the monetary policy rate and the fixed term. The question, then, is how much.

Albornoz points out that “taking into account that the Treasury validated rates close to 119% (TEA) and that the LELIQ yields 107%, the BCRA has room to raise it.” Let us remember that the Central Bank has been managed since July 2022 with a rate broker in which Treasury yields act as a ceiling.

Buteler anticipates that “There is talk that the performance of the fixed term would increase about 5 points to guarantee a positive rate, after February’s inflation”. And the same is estimated by the director of CyT Asesores Económicos, Camilo Tiscornia, who maintains that “they should at least raise the rate to 80% nominal per year.”

If it takes it to that level, the monthly yield would be around 6.66%, even with February inflation. “In that case, we would be talking about a marginal retouching”, clarifies Sigaut Gravina. Meanwhile, if you want to give a stronger signal, you should raise it by 7 points, so that it would reach 82% and guarantee a monthly return of 6.8%.

Core inflation and LELIQs, stones in the BCRA’s shoe

And, finally, some voices in the City maintain that, in order to carry it above core inflationyou should already think about an increase above 17 points, which would take it from 75% to 92% annually, with a monthly return of 7.7%. However, that possibility is ruled out almost unanimously by analysts, who expect a more conservative rise of between 5 and 7 points.

The problem is that the BCRA must consider the rise in the rates of the LELIQ as the side effect of the rate hike. The entity’s liabilities are a big “alert” sign today, in the balance sheet of the financial regulator and that would harm it even more.

Likewise, the increase in fixed-term rates results in an increase in the cost of credit, which is another problem for the Argentine economy because it strongly affects people’s pockets and consumption, a serious problem, especially in an election year.

Source: Ambito

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