Argentina’s central bank kept its monetary policy rate at 27.25 percent and confirmed its intervention in foreign exchange markets in recent weeks to “sustain the value of the currency” and ensure that inflation continues to trend downward.
The Central Bank of Argentina (BCRA), which cut its policy rate twice in January by a total of 150 basis points, also pledged that it is monitoring the situation on the foreign exchange market and “will not relax its monetary policy until signs of disinflation compatible with the path sought are confirmed.”
Today’s guidance follows it previous guidance in late February that it would “exercise extreme caution” before relaxing its monetary policy.
BCRA has been intervening in the foreign exchange market in recent weeks to shore up the peso, which has weakened steadily since Mauricio Macri’s government in late December pushed back its aim to lower inflation to 5 percent by one year to 2020 and raised the 2018 inflation target to 15 percent from a previous 8-12 percent.
BCRA said it decided to intervene because it was convinced that a depreciation of the peso greater than what already happened was not justified by real economic conditions or the planned course of monetary policy.
Without any intervention in support the peso, the disinflation process would potentially slow down, the central bank said, adding it ratifies its policy of a floating exchange rate with occasional interventions as a complement to monetary policy “in the face of disruptive dynamics capable of altering the course of inflation or generating negative effects on financial conditions.”
On March 8 the central bank was reported to have intervened in the currency market several times by selling U.S. dollars, its first intervention since August 2017. The first foreign exchange sales came after the peso topped 20 to the U.S. dollar.
In addition to the impact from a higher inflation target, Argentina suffers a seasonal shortage of dollars during its summer months as revenue from exports doesn’t arrive until late March while holidays and overseas trips generate demand for foreign currency.
“After the pronounced depreciation observed since December, during the last weeks the peso continued to show signs of weakness,” BCRA said.
Today the peso was trading at 20.2 to the dollar, down 7.9 percent since the start of 2018 and down 21.5 percent since the start of 2017.
Argentina’s headline inflation rate rose slightly to 25 percent in January from 24.9 percent in December while core inflation was steady at 21.1 percent.
For February the BCRA said inflation is expected to rise further due to higher regulated prices and the prices of some tradable goods.
But the central bank said it considers this acceleration in inflation as “temporary” and inflation should consolidate the downward trend after adjusting to higher prides and exchange rate dynamics.
BCRA said the latest survey of market expectations showed inflation expectations for 2018 rose to 19.9 percent from 19.4 percent for general inflation and to 17.1 percent from 16.9 percent for core inflation. For the next 12 months, expectations eased to 17.6 percent from 18.6 percent.
For 2019 inflation expectations rose to 14.0 percent from 13.5 percent and to 9.7 percent from 9.1 percent for 2020.
In addition to rising inflation, Argentina is experiencing its worst drought in 30 years, which has led economist to lower their growth forecasts for this year to 2.5 percent from 2.9 percent due to the expectations that the harvest of corn and soybeans, which make up more than one-third of its exports, will decline.
Argentina’s economy grew by an annual rate of 4.2 percent in the third quarter of last year and is estimated to have grown 2.9 percent in 2017.