Not even 50% inflation will make Argentina boost interest rates

Argentina’s Central Bank is ruling out increasing interest rates for the foreseeable future even as currency pressures mount and annual inflation climbs above 50 percent.

The country’s monetary authority is prepared to keep holding its key rate for months to come, according to people with direct knowledge of the matter. The Central Bank, know as BCRA, is betting that inflation will slow in the remainder of the year and is optimistic that international reserves will continue to grow, said the people, declining to be named discussing internal policy.

The Central Bank has held its benchmark rate at or around 38 percent since March 2020. After a slowdown during the second part of last year, annual inflation accelerated back to 50.2 percent in June.

Unlike most Group of 20 nations, the government of President Alberto Fernández has shunned the use of inflation targeting or other similar monetary tools and instead focuses on a slew of unorthodox policy options to control price expectations. The policies in its toolkit had included using subsidies, company fines and price controls on a range of items to try to stop price gains.

It has more recently tried to slow down the devaluation of the official spot peso to reduce the pass-through on domestic prices. Yet that strategy has heated up the peso in parallel markets, approaching levels last seen in October.

Officials at the Central Bank, which isn’t independent from the government, privately dismiss traditional monetary tools including raising rates, arguing they failed to stop inflation during the government of Mauricio Macri, when the benchmark rose above 80 percent at one point.

The BCRA declined to comment.

Extra complication

Another complication from raising rates, in the eyes of the institution led by Miguel Pesce, is that interest payments on central bank debt today is the main driver behind the growth of the amount of money in the economy. Interest payments on Leliq notes and repos were around 100 billion pesos (US$1 billion) per month from March and these payments would be even higher if the bank increases borrowing costs, the people said.

The amount of money in circulation has grown at a pace below inflation so far in 2021, but economists anticipate a spending spree ahead of midterm elections in November, when the ruling alliance is trying to retain its majority in congress. The Central Bank is estimated to print another 900 billion pesos in second half, nearly double the amount printed in the first half, according to Buenos Aires-based consulting firm Equilibra.

Officials within the Central Bank are also concerned that private lending hasn’t increased despite incentives provided to banks, said one of the people. To combat that, it plans to expand regulated loans for productive investments to include large and medium-size companies on top of giving additional payment facilities.