Collateral risk in the fight against inflation

Last Thursday, the Central Bank of the Republic of Argentina (BCRA) raised the traditional fixed rate by 8.5 percentage points and set it at 69.5%, which is equivalent to an effective annual rate (TEA) of 96.5%. The purpose of this measure, according to the BCRA, is “Increase the incentive to save money”But, in a context where The Consumer Price Index (CPI) for July came in at 7.4%With the worst monthly inflation data since April 2002, economists say this is not enough and warn of some side effects.

,The Central Bank follows inflation with rate hikes as it is always a reaction to the previous month’s index and in fact the increase should be applied keeping in mind future inflation and not the past.observes Christian Butler, an economist specializing in capital markets.

It should be noted that with the new rate set by the government, fixed deadline The number of human individuals up to 30 days began to rise to 10 million Monthly return of 5.79% (based on TNA).

With these figures, Camilo Tiscornia, economist and director of CyT Economic Advisors, observed that, Although “rate hikes were very strong and represented a good sign for the market as yields on peso instruments are slightly closer to projected inflation levels”, they are still low. Taking into account the price index for July which is 7.4% and a forecast for August, which expects to be above 6%.

“If inflation slows down a bit in the coming months, the relationship will start to turn more positive and there will be signs that the government is betting that the price index will go down,” predicts Tiscornia. And that is, he warns, equating the inflation rate to current levels is still very reasonable.

So his argument coincides with Butler’s, when he thinks it’s good to apply a rate hike, but he thinks it takes a bit more to keep the price index from going up. . Must be aggressive. And he argues: “We have seen Throughout the year, after 30 days, the rise in rates becomes negative whereas it was initially positive.,

Inflation levels mean that the return on investment in pesos is never achieved.

But that’s not the only warning from analysts about rising rates. Another thing they point out is that while it’s necessary right now, the economy tends to have consequences, which are as follows:

Higher rates and higher cost of credit

“The rate not only rewards those who live in pesos, but also makes it more expensive for those who need financing to take out credit,” Butler said. And he points out that it is to a certain extent, What the government wants: Because less money is circulating and that allows prices and dollars to go down.

But it brings, on the one hand, a contraction effect on economic activity Since many entrepreneurs cannot afford such high finance charges when it comes to credit financing and investment is limited,

It is true that many can resort to selling in dollars or finance themselves with a fixed term rate. But, on the other hand, the analyst argues, this leads the person who has dollars to save and who needs to buy or invest to analyze what is best for him, whether in pesos himself. same. Buying or financing is selling dollars.

“Kono high financial costThe investor thinks twice and also evaluates what can happen to him exchange ratesaid the butler. If you think the dollar might trend higher in the coming months, you could explicitly consider not selling and waiting to see what happens.

While on the other hand, with a rate that does not strongly outperform inflation, an arrangement to invest over a certain period of time may also be impractical to finance yourself with the rate.

It is very difficult for the BCRA to beat inflation with the rate.

Increase in quasi-fiscal deficit due to higher rates

Tiscornia mentions that another major collateral problem of rising rates is that the interest cost of LELIQ for the BCRA also increases. Note that the return on this liquidity-absorbing instrument increased by 9.5 percentage points to the same level as the fixed term rate of 69.5%.

And economists point out that, on the one hand, The BCRA will have to pay the banks for these instruments and, on the other hand, “it also harms the process of holding Treasury loans.which must offer faster and better rates to make its debt instruments attractive”.

Thus, he argues that at a time when everything is so volatile, this outcome of a yield correction implemented by the Center could be detrimental as it could hit the budget deficit.

pressure on the evolution of the official dollar

Finally, bearing in mind that rate hikes attempt to silence exchange rate developments and reduce the gap between official and alternative rates, by removing pesos from these markets and converting them into the local currency. leads to investment, Tiscornia explains that it is necessary to take into account what is the relationship between rate level And that creeping ankle,

“The fact is that the current rate of 5.8% is the rate at which the exchange rate increases every month. This means that savers who want to hedge against possible devaluation may find the new rate advantageous relative to growth. official dollar, but the relationship with this variable is also very reasonable, ”explains the analyst in this regard.

Thus, he states that If the projection of the official dollar’s devaluation remains so tied to the monthly rate, it is not as effective in protecting against future exchange rate growth as higher interest rates that warrant greater hedging.

The BCRA's pricing policy should be accompanied by other economic measures.

The BCRA’s pricing policy should be accompanied by other economic measures.

Therefore, there is a general consensus among analysts that, If this rate increases a. is not with strong fiscal policyShe continues to be effective in achieving her goals.

“This rate hike should lead to lower inflation and less pressure on exchange rates, but it should be achieved by complementing it with other measures,” Butler speculates.

A reduction in monetary issuance and a substantial reduction in the public deficit are the first elements that economists point to as essential actions in this direction. And they point out that a key point on this path will be to examine what is being done specifically in terms of subsidies, which were announced by the Minister of Economy Sergio Massa shortly after, but which, in practice, have yet to be accomplished.