Monetary Policy Report | June 2015

What monetary policy showed in June 2015: a rising monetary base, more LEBACs in the market, and stable reserves despite maturities. September 2015 report.

The Central Bank's monetary base consists of two factors: money in circulation and the reserves that banks hold with the institution. Banks generally have little incentive to keep their own funds tied up. Therefore, it is expected that there will be little difference between the amount mandated by law (commonly referred to as the anchor ) and the amount required by law.

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Let's look at what's been happening with this aggregate. So far this year, the growth of the monetary base has registered an average annual increase of 30,66%. This puts it 10 percentage points above the average recorded last year. Considering only the month of June, the amount reached $482.719 million, the highest of the entire year.

In fact—and to be fair to the argument—throughout the first quarter of 2015, the monetary base continued to grow year-on-year. But it did so at a slower pace than inflation.

Moreover, a slight month-on-month decline had been recorded, which, together with the greater placement of domestic debt for Treasury financing, left open the doubt as to whether there was any indication of a change in monetary policy.

Monetary base and LEBACs: Did sterilization stop?

With the consolidated information up to June, that is, adding the results of the second quarter of the year, the new question that arises is whether the monetary authority has abandoned the option of sterilizing or, on the contrary, the stock that continues to accumulate of LEBACs reduces the margin to continue executing this maneuver and the growth of the monetary base is only the result of a certain exhaustion in the use of this instrument.

Indeed, the question is valid because after the halt imposed on Treasury bill issuance in April , when the Central Bank withdrew $15.255 billion from the market for this purpose, the stock of these instruments has expanded again in subsequent months, reaching $370.347 billion, of which $21.071 billion corresponded exclusively to issuances made in June. In other words: more monetary base, but also a greater quantity of Treasury bills in the market.

One thing that can be stated with certainty concerns the maturity structure of these types of placements. In the auction held every Tuesday, on May 26, the monetary authority reduced to one-fifth the maximum limit for those instruments with maturities of 90 and 120 days.

In this way, the Central Bank directs the investment portfolio of banks towards longer-term horizons (the longest-term LEBACs are for 180 or 270 days) with nominal interest rates that begin to be close to 30% (April is the last month declared and registers a nominal rate of 29,72% for 12 months).

Bookings at the end of June

All of which leads us to ask what's happening on the asset side. Specifically, as of the end of June, how are reserves evolving?

Thanks to the framework for the execution of the different tranches of the Chinese swap , originally activated on October 30, 2014, the acquisition of foreign currency through the placement of YPF negotiable obligations on April 28, and the placement of the BONAR 24 in external financial markets , reserves have been able to remain at a relatively stable level throughout the first half of the year.

Al finalizar el mes de junio se han declarado reservas por un monto de US$ 33.851M, cifra que representa un 64% de la base monetaria.

However, it must be noted that this figure has its complications. Part of the stock corresponds to immediately due debt, frozen due to Judge Griesa 's unfortunate ruling and subsequent injunction.

It is also true that payments to importers are being delayed. In general, payments are released more easily for activities involving priority issues, such as energy. And of course, by the end of May, an expansion of the swap with China had already begun to be planned.

None of this foreshadows, in any way, the two extreme positions being discussed in the media. A catastrophe is not inevitable, but neither is it an entirely optimistic scenario that doesn't require implementing active measures, such as debt restructurings or swaps.

Debt maturities until the end of the year

For now, for the rest of the year the obligations for payments of principal and interest on debt alcanzan los US$ 22.027M. De ellas, un 32% se encuentra denominado en foreign currency (es decir, US$ 7.074M).

Most of the focus is on the payment of the BODEN 2015 bonds , which are due on October 4th. Therefore, it seems likely that this topic will dominate the following reports. For now, we invite you to download the consolidated report for June.

Open access, for use and citation

The report is available freely and without charge, under a Creative Commons license (CC BY-NC-SA 4.0):

Informe Mensual de Política Monetaria | Junio 2015. Informes del Observatorio UNR N.º 11 — Serie Informes de Coyuntura N.º 7, septiembre de 2015. ISSN 2683-9067 / 2683-9075. Autor: Germán A. Tessmer.