Unlike what was seen in Cambiemos’ management, in monetary matters the new Government has been applying a restrictive monetary policy that is consistent with the restrictive fiscal policy. As the economist clearly illustrated in those years Miguel Broda, The economic policy error was having turned on the air conditioning of monetary policy, but simultaneously, turning on the heating, via fiscal policy. This time, they have turned on the air conditioners in both branches of economic policy, and this is reflected very well by economic activity.
The government of Javier Milei and the officials elected to implement economic policy opted for a traditional policy of control of monetary aggregates (“Monetary base“, “Payment methods” -M2- and “Broad payment methods” -M3-), unlike that applied in the rest of the world, where the instrument of restrictive monetary policy is the increase in the interest rate.
As a result of the strict control of monetary aggregates, both the Base (currency plus deposits in pesos from banks in the Central Bank -BCRA-) as M2 (current currency held by the public, plus demand deposits in pesos from the public and non-financial private sector) and M3 (M2 plus the total deposits in pesos of the public and private non-financial sectors) registered sharp falls in real terms, which took them to historical minimum levels.
Given the inflationary process with monthly rates of around 12 to 14% and nominal interest rates after the last cut lower than 7% nominal, it is evident that the Government applies a restrictive policy of controlling the amount of money, but with rates very low interest rates, very negative in real terms, in order to avoid excess issuance linked to the payment of interest on the BCRA’s Remunerated Monetary Liabilities.
Tight monetary control in the first two months: How does it continue?
The first two months showed eloquent data of the tight monetary control. On the one hand, the monetary base that in the last two months of the administration Fernandez-Massa It increased more than 31%, since the inauguration of the libertarian government it grew just above 4%. Something similar happened with monetary aggregates given that the Private M2 which between October and November of last year grew above the 5% monthly average, fell in the first two months of 2024 below 4% while the total M3 stopped abruptly, going from growing above 4% monthly to a rate just above 1%.
Now, it is worth considering how sustainable this tight monetary control is over time. To try to answer this question, we must delve into the factors that are expanding the Monetary Base and the factors that are contracting it.
In the first two and a half months since the new Government took office, the Monetary Base increased almost $417,000 million. On the one hand, the expansive factors were the strong dollar purchases for almost $7 billion barely compensated by sales of dollars to the Treasury for $1.3 billion (the net expansive effect was more than $5.6 billion); Secondly, the “Others” account, which includes several items such as BCRA interventions with bonds and currencies, etc., since almost $1.8 trillion were issued through this window to face the execution of the “puts” of the banks (options purchased from the BCRA for the purchases of public securities) and the issuance of the Bills adjustable by the BCRA dollar (Ledivs) which exceeded the absorption of pesos due to the issuance of the bonus for importers (Bopreal).
On the contrary, the factors that acted to contract the Monetary Base were the Treasury for almost $6.5 billion as a result of the net financing obtained in the placements of public debt that returned pesos to the BCRA to repurchase public debt; and on the other hand, the BCRA absorbed just over half a billion pesos via remunerated monetary liabilities.
Concerning exhaustion of the BCRA strategy
With an eye on the medium term, analysts express some concern about a certain exhaustion of this strategy since the peso absorption factors that allowed the Monetary Base to be kept under control in these first months of the new government tend to moderate or even decrease. disappear.
The Ministry of Economy and the BCRA planned to issue some US$10 billion of Bopreal and have already placed more than US$8 billion. so that there is not much more left for this instrument to aspire weights. On the other hand, the “Others” factor would be more expansive than contractionary as a result of the issuance of “puts”. As if that were not enough, the remunerated Monetary Liabilities would stop playing in favor of the contraction of the Monetary Base to switch to the expansive team given the magnitude of the interest they pay monthly of more than $2 trillion.
As for the Treasury, everything indicates that now it will not be as easy for it to continue achieving net financing as at the beginning of the administration and thus be able to repurchase debt from the BCRA and aspire to pesos. About, It is worth remembering that most of the issuance of Treasury bonds had the complicity of the attractiveness of the “puts” that the BCRA offered to the banks., and this, at least, is not consistent with the objective of going towards a credible monetary program that aims to have sensible control of monetary aggregates. In addition, it is assumed that the BCRA will continue purchasing reserves with the consequent monetary issue.
Therefore, it is not clear how the BCRA will manage to reduce the issuance of foreign currency purchases and keep the growth of the monetary base under control. So everything looks like the policy of strict control of the Base and monetary aggregates does not seem very sustainable over time, as well as the current fiscal adjustment policy based on the liquefaction of spending. So, today we are still far from stabilization since no matter how much the real amount of money falls to historical minimum levels, which, if a virtuous circle of confidence begins, triggers the real demand for money, in the medium term the BCRA will not have the tools he had to control the monetary base at the beginning of the administration. Of course, in all this confusion, politics in general also has its part, that is, helping to recreate confidence in the economic direction that the market still doubts.
Source: Ambito
