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BCRA to Reinforce Monetary Policy Contractionary Bias and to Adapt Regulations to the New Monetary Scheme

The Central Bank of Argentina (BCRA) changed its monetary policy scheme to implement a target of zero growth in the monetary base until June 2019. In this sense, the BCRA resolved to make changes in regulations in order to reinforce the contractionary bias of its monetary policy thereby moving in the direction of the target it has committed to.

Firstly, the BCRA raised minimum reserve requirement rates by 3 percentage points for major institutions in the system to pave the way for the removal of the stock of LEBAC bills in October. This increased requirement may be complied with through BCRA Liquidity Bills (LELIQ) and/or BCRA Notes (NOBAC). Since these are interest-bearing instruments, this measure should not trigger a reduction in deposit rates in the system.

With a view to encouraging institutions to raise new time deposits, the BCRA has established that the minimum reserve requirement on such new deposits may be fully complied with through LELIQs and NOBACs. This incentive to increase deposit rates and to raise time deposits reinforces the monetary policy contractionary bias.

In addition, the BCRA has reduced daily minimum cash requirements. This will allow banks to participate more actively in LELIQ auctions conducted by the monetary authority thereby mitigating the effect of the monetary base targeting on the variability of the monetary policy rate. The easing of daily minimum cash requirements has no effect on the monthly average requirement which is certainly relevant for the average monetary base targeting calculated on a monthly basis.

In order to further promote the raising of time deposits, institutions are allowed to pay interest at least every 30 days rather than paying interest in full at maturity date which was the only option available under the previous regulation. With a range of options available, institutions may offer instruments that are more suitable for customers. Finally, institutions may obtain BCRA's notes in exchange for the cash they hold in excess, provided that the amount of such banknotes has not been allocated to BCRA's certificates in exchange for the cash they hold in excess”. The notes will accrue interest equal to 1/5 of the BCRA’s benchmark rate.

September 28th, 2018

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