MercoPress. South Atlantic News Agency

BCRA raises interest rates to bring down inflation projections

Inflation in Argentina is one of the highest worldwide.

Argentina's Central Bank (BCRA) Thursday decided on a sharp rise in interest rates to calm down inflation projections. The measure was taken before data for July 2022 was released later in the day.

The monetary authority argued that the announcement “seeks to continue with the process of normalization of the monetary policy rate”. It is part of a policy of strong monetary restriction and consolidation of public spending that the new economic team is seeking to carry out. One of the main risks of this strong rate hike is the exponential growth of interest payments on the quasi-fiscal debt.

The BCRA increased the monetary policy rate by 950 basis points. Leliqs bonds will now yield an APR of 69.5%, which is an effective rate of 96.8%, way above forecasts published in the latest BCRA REM survey (Relevamiento de Expectativas del Mercado - Market Expectations Survey).

The Central Bank applied a strong interest rate hike to calm inflation expectations. The monetary move also seeks to avoid new exchange rate shocks which played a significant part in July's inflation. “After two months in which inflation showed a downward trend, prices accelerated in July in the context of the increase observed in financial volatility at the local level, which negatively affected inflation expectations.”

The BCRA also raised the minimum rate for traditional fixed-term deposits. The Board of Directors determined an increase of 850 basis points for 30-day deposits of up to $ 10 million, whose floor now stands at 69.5% per annum.

According to a statement from the country's monetary custodian, the measure “will contribute to reducing inflation expectations for the rest of the year” while “consolidating the financial and exchange rate stability achieved after the disruptive events of the last two months that motivated the BCRA's intervention in the secondary market of government securities.”

In last week's REM, economists had projected inflation would close 2022 at 90.2% year-on-year, after adjusting their forecast upwards by 14.2 p.p. with respect to the previous survey.

The bank's statement also highlighted that the new measures will speed up “the process of normalization of the structure of lending and deposit interest rates of the economy to bring them closer to positive territory in real terms, in line with the Objectives and Plans for 2022 established in December 2021.”