BCRA’s ‘Phase 2’: New Fixed Rate Details and Nearly $2 Billion to Sell to Lower Dollar

He Central Bank of the Argentine Republic (BCRA) confirmed on Tuesday that it would seek to remove up to $2.4 trillion from circulation by selling reserves on the markets Dollar CCL and MEPaccording to a statement released by the organization, in which it detailed “Phase 2” of the government’s stabilization program Javier MileyThere are nearly US$1.9 billion with which he will also seek to preserve currency gapin a “discretionary” process in which they will sell dollars to buy back pesos issued through purchases on the foreign exchange market.

The roadmap published by the BCRA, which chairs Santiago Bausilidescribes in detail the first steps of monetary policy and explains the objectives of this new phase, the aim of which will be to achieve a “peso deficit” to reduce inflation, as also explained by the Minister of Economy, Louis Caputo. The company also expected an increase interest rate belonging Fixed terms due to the tax effect of transferring all of its remunerated liabilities to the Treasury upon the debut of liquid fiscal bills (LEFIs).

“To ensure the reduction of inflation, the BCRA will proceed with the sterilization of pesos issued for balance of payments purchases after April 30, the date on which the money supply was limited in relation to the BMA (Broad Monetary Base) level,” the BCRA said in a statement.

“The maximum reduction in the money supply envisaged in this way will be in the order of $2.4 trillion and will begin with the choice of selling dollars in parallel foreign exchange markets, including the MEP and CCL, as the operating mechanism. Both the pace and the total volume of sterilization, as well as the market in which it will be carried out, will be managed by the BCRA based on the quarterly dynamics of liquidity and the implications for price stability that a deviation in its evolution from the defined trajectory in monetary programming may cause,” the monetary authority specified.

Economist Salvador Vitelli calculated that that $2.4 trillion represents $1.88 billion at today’s CCL exchange rate, which is the firepower with which the BCRA will seek to contain the gap.

The objective stated by the organization in its document is to maintain the broad monetary base (BMA) at the current level of 47.7 trillion US dollars (9.1% of GDP), so it will seek to sterilize the issued pesos by buying reserves by selling dollars on the financial markets. This amount of pesos, the organization emphasized, corresponds to the level of August 2019, before the exchange rate was restored during the government of Mauricio Macri.

“The establishment of this ceiling on the expansion of demand for BM allows us to expect that with the introduction of currency competition, the peso will become a scarce currency,” the organization said. This roadmap was complemented by the closure of other sources of money emission: financing of the budget deficit, puts in the hands of banks and remunerated liabilities.

On the latter point, BCRA stressed that it had managed to transfer all of its outstanding debt to the Treasury at the start of trading. Liquidity Income Tax (LEFI) Letters: “On the first day that LEFIs became available, banks subscribed for a total of $10.85 billion. BCRA decided to cancel the passive repo window effective July 22, thus completing the process of reducing its remunerated liabilities from $52 billion in November 2023 (in constant June 2024 prices) to their full liquidation in July 2024.

The result of this measure will be an improvement fixed interest rate for tax effect. “Due to the tax regime of LEFI (they are not subject to tax on gross income), at the beginning of operations, the net monetary policy rate received by banks will be automatically increased from 3.00% to 3.34% TEM (monthly effective rate). The BCRA Board will regulate the liquidity of the banking system by setting the level of the LEFI interest rate and the active repo rate based on monetary programming,” they said.

In line with what Caputo explained, monetary authorities argued that there would be an increase in demand for the peso and an increase in private credit.

“The remonetization process is also expected to lead to growth in broader monetary aggregates after several years of contraction in real terms. The incentives of the new monetary system were defined by the BCRA with the aim of reversing the crowding out of credit to the private sector caused by the fiscal deficits accumulated in the past. These deficits contributed to the decline of bank credit to the private sector to only 4% of GDP. The crowding process expected by the BCRA will be accompanied by an increase in the money multiplier. To date, it has been seen that credit growth in pesos (in real terms) and dollars has been 6.8% and 79.8% compared to the end of 2023,” the BCRA concluded.