The BCRA Lowers the Monetary Policy Rate and Tightens Control over Monetary Programming

The authorities of the BCRA have observed that the government's deep commitment to zero fiscal deficit increases the credibility on the economic program’s central anchor and strengthens the path towards lowering inflation expectations. This sustained commitment enabled the BCRA to reduce—in real terms—the factors that had fueled growing monetary imbalances and inflationary instability in previous years.

Within the background of this measure, the BCRA undertakes to remove its monetary financing to the Treasury (required to overcome its budget deficit), and to adjust the BCRA's balance sheet accordingly. This process is critical to strengthen independent monetary programming and to reduce its uncertainty in the future. The remuneration of BCRA’s financial liabilities is another factor that also contributed to cause macroeconomic imbalances in the past years.

The BCRA is responsible for curbing the endogenous creation of money through the monetary policy rate, which is a complementary anchor to keep inflation expectations on a downward path. Today, loans to the private sector are at historically low levels in Argentina. Unlike other economies where lower interest rates boost the secondary sources of money creation through bank credit, the primary creation of money mostly shrinks in Argentina. In order to continue reducing the primary creation of money and deepening the disinflation process, the BCRA has lowered overnight interest rates on reverse repos to 40% APR.

The BCRA must ensure a smooth functioning of monetary policy instruments, as set out in its Charter, in order to achieve price stability. In the past few months, the BCRA has been removing financial subsidies that prevented it from getting a grip on monetary expansion.

In this line, the BCRA has resumed its discretional power to intervene in the securities secondary market, which has been limited until now by predetermined prices as provided for by the regulations (2% spread). This way, the BCRA will contribute to the smooth functioning of capital markets and will regulate the amount of money available, as established by Section 4 of its Charter.

The decision adopted today is in line with the Treasury's auction scheme that will take place every two weeks with the aim of building a benchmark interest rate curve for the

Treasury’s short-term liquidity, ensuring investment alternatives to capital market participants.

May 14, 2024

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