Interest rates also fall short, because they turn negative in real terms. In other words, whoever made a fixed term 30 days ago today with the capital and interest buys fewer products than he could buy 1 month ago. When that happens, consumption is encouraged and saving is discouraged. Or what is even worse, saving in hard currencies (hoarding in dollars) is encouraged.
As we can see, the implications of such high levels of inflation are very important and require rapid decision-making. From the social perspective, we will surely see several ads that seek to compensate the income of the most unprotected segments.
From the exchange and financial perspective, we have already seen some decisions and in the next few hours some more could be added. The first thing the BCRA did was to accelerate the rate of depreciation of the exchange rate. With this, it seeks to prevent the real exchange rate from deteriorating. In the last 10 days I have taken him to the 4% monthly lifeline. That pace looks good enough to offset February’s 4.7% inflation, but falls short of March’s 6.7% just announced.
Will it be encouraged to speed up the pace by 2 points per month in the coming weeks so as not to lose exchange competitiveness or will it seek to recover ground later if inflation slows down? It is a first decision that will be taken in the coming days. Accelerating helps to avoid losing the real exchange rate, but there is a risk of reinforcing inflation and much higher levels of interest rates than the current ones are needed.
Precisely the Interest Rate is the other variable on which decisions must be made. The BCRA is expected to increase the monetary policy rate and the fixed-term rate, but the magnitude is not yet known. Although it will probably rise, as happened last month, it will be defined based on annual inflation expectations and not the rhythm of these months. This implies that in the short term interest rates will continue to be negative in real terms. The CER between April 15 and May 15 will increase at an annualized rate of 115%. That figure clearly exceeds the interest rate level chosen by the BCRA and is surely higher than the rate of devaluation.
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In short, we are facing a scenario in which inflation accelerated and marked a new nominal rate that requires defining new strategies for the interest rate and for the rate of depreciation. The question we ask ourselves in this new context ishow do we preserve the purchasing power of pesos?
The first answer that arises to this question is to resort to assets that adjust by CER, but the shorter sections of the CER curve yield negative spreads, this implies that the yield is the expected inflation minus a spread. Only the instruments with maturities from 2024 show a positive spread over inflation. A bond like the T2X2 that matures in September today yields inflation minus 10.6%.
For this reason, for retail investors, a good option is Fixed terms with UVA adjustmentwhich yield Inflation + 0.5% per year, but have a minimum term of 90 days.
In the case of larger amounts or shorter terms and greater access to liquidity, the option chosen by investors has been the Common Investment Funds aimed at providing coverage against inflation (FCI CER). These funds have a portfolio of CER assets distributed along the entire curve, and today earn an Inflation yield minus 2.5% with access to liquidity within 48 hours. At MegaQM we are offering two products with these characteristics and they have received strong interest from investors. These are the FCI Megainver Absolute Return and the Quinquela Total Return.
The question that arises going forward is what happens if the rate of inflation cannot be lowered in the coming months. That is the biggest challenge today, because if it is not achieved, scenarios in which more marked adjustments to the exchange rate or the interest rate will become more likely to occur. If that happens, the flow of investors will begin to turn in part to other hedging assets, although, even in these scenarios, CER hedging will continue to be a good alternative.
Source: Ambito
