Argentina holds policy rate

Argentina holds policy rate

Economy & Policy Corporate & Sovereign Strategy Argentina

Argentina's central bank has left its benchmark policy rate unchanged at 40% and said its forward bias would remain hawkish.

The bank's monetary policy committee (MPC) has pledged to preserve the restrictive policy bias until the inflation trajectory and expectations for inflation align with the 17% target rate for 2019. This target was outlined in the IMF plan after Argentina signed a $50bn agreement with the multilateral lender.

According to a report from Alberto Ramos, an analyst with Goldman Sachs, the central bank could try to control rates, and money supply, implying it will have more than just the interest rate as an instrument. Other instruments could be reserve requirements and open secondary market operations to control growth of short-term rates and liquidity.

"In doing this, we see the risk of policy inconsistencies [because] one cannot simultaneously control rates and amount of liquidity," added Ramos.

The MPC did acknowledge risks to the inflation outlook in the event that higher-than-expected FX volatility passes through to retail pricing. But, according to Ramos, the MPC's commitment to stop funding the treasury and reduce excess liquidity within the system should help contain inflation.

In June, headline inflation accelerated in June from 2.1% and core inflation was at 27% at the end of May. This was driven by the effects of FX instability.