June 9, the Central Bank of the Argentine Republic (BCRA) He surprised the market with a deep technical turn in its monetary policy strategy. Under the title of “Measures for the Strengthening of International Reserves and the consolidation of monetary aggregates control”, the monetary authority announced The end of fiscal liquidity letters (Lefi) As of July 10, the instrument that for months officiated as a nominal anchor by setting the monetary policy rate. The movement marks the beginning of a new stage: The BCRA stops fixing a reference rate and operates under a scheme where the amount of money is the explicit objective and the interest rate is determined endogenously by the market.
The decision – an advanced one month in advance – was not simply an operational change, but a conceptual redefinition of the monetary framework. In practical terms, the interest rate ceases to be the main monetary policy instrument, and becomes a result variable, emerging the balance between supply and demand for money. The BCRA now aims to control a specific monetary aggregate: the M2 private transactional.
What is a scheme of monetary goals?
Unlike inflation or fees control regimes, in a Monetary aggregate goals scheme The Central Bank intends to set the growth of a money measure – as M1, M2 or the monetary base – and adjust its operations to meet that goal. Instead of intervening directly on the price of money (the rate), it focuses on its quantity.
The reasoning behind this approach is simple in appearance: if the amount of money is controlled, inflation in the medium term can be limited. But the execution is complex. The demand for money is not stable and the circulation speed It can vary abruptly, making the same level of money generate very different price pressures. In that context, the interest rate – to stop being controlled – tends to show high volatility, which impacts the cost of credit, investment decisions and the exchange rate.
The end of the Lefi and a market without anchor
In this new regime, the BCRA deactivated the Lefi, which until then fulfilled the role of absorbing daily liquidity surpluses at a predefined rate. Financial entities used these instruments as a tool to administer their residual liquidity, and the rate paid by the BCRA was projected as a reference for the rest of the financial system.
The official plan was that, during the transition period, banks gradually migrate their balances to short -term treasury letters, which would fulfill the function of liquidity administration instruments. However, that transition did not happen as expected. Upon the expiration of the Lefi, a significant mass of pesos was left without a clear destination, causing a excess liquidity In the system and a Abrupt fall in short -term interest rates.
Rising volatility and cross signals
The treasure had to intervene with an extraordinary tender, outside the usual calendar, to absorb excess weights. He did it by paying significantly higher rates than those offered in the Lefi, something understandable given the least liquidity and the greatest perceived risk of the new instruments.
The market reaction was immediate. The rates implicit in the Cajución market – guaranteed prosecuts with values in the stock market – came to overcome the 100% annual nominal. The secondary rates of the shortest Lecap climb the 85%while the financial dollar continued with an upward trend that was already taking speed weeks.
The immediate result of change was a greater volatility in interest ratesa Raise in the demand for dollars and a BCRA forced to intervene strongly in the futures market to contain the expectation of devaluation. In summary: more rates, more dollar, more intervention.
Savings Investments Fixed Term Interest rates bonds
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Ordered transition or systemic risk?
The key now is to determine if this instability is transitory – a phase of logical adaptation in the passage to a new regime – or if it is a sign that the scheme faces structural limitations. If the market manages to “accommodate” and rates find a level of balance consisting of projected inflation (which today is 25% per year), the impact on the real economy and fiscal accounts will be moderate. But if Volatility becomes the normor if the rate is stabilized above 50%the cost will be elevated: investment drop, credit increase and greater pressure on the interest spending of the Treasury.
Volcker lessons … and warnings
The aggregate control scheme is not new. At the beginning of the 80s, the Federal Reserve Bajo Paul Volcker applied a similar regime to contain two digit inflation. The result was a combination of falling inflation, severe recession and historically high interest rates. Subsequently, the regime was abandoned in favor of interest rate goals, more effective in stabilizing expectations.
At the time, the former governor of the Central Bank of Canada, Gerald Bouey, summarized with irony the limits of this approach: “We did not abandon monetary aggregates. They abandoned us”.
What follows?
The BCRA bets that the control of the amount of money will reduce structural inflation without the need to set artificially high rates. But, when the market determines the rate, also accept the costs of greater volatility. For now, the transition shows more shocks than certainties. And the question is whether the market will find its new balance before monetary noise is transferred to the real economy.
Source: Ambito
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