- discourage demand in Dollars (and its correlate in prices) seeking to avoid an exchange jump. In turn, according to Ecolatina, it allows “keeping at bay the Dollars and the gap (anchoring expectations) as well as not putting liquidations at risk (and strengthening reserves) in a context of accelerating depreciation”.
- Impact on financial intermediation: By increasing yields in pesos, the aim is to sustain the attractiveness of placements in local currency, which relatively discourages consumption over savings. This also has an impact on credit, since by making it more expensive, it shortens demand. In this way, “the use of this instrument implies a short-term trade-off between moderating inflationary pressures and sustaining the level of activity.”
In summary, “a higher rate seeks to placate the demand for dollars and, consequently, its correlate to prices. It also allows the BCRA to speed up the pace of depreciation without putting settlements at risk. In this sense, the first channel would seem to be working.”
financial intermediation
In the agreement with the IMF, the Government explicitly stated that it aims to “amplify the transmission of monetary policy rates to deposit rates” (that is, maintain the attractiveness of saving in pesos). However, as previously mentioned, attack the inflationary process in this way (which relatively discourages consumption and makes credit more expensive) would imply a counterposition with the aim of boosting economic activity. In this channel the effectiveness seems to be somewhat more limited essentially for two reasons:
- The very low level of financial depth in Argentina makes monetary policy less effective, requiring stronger signals and actions to achieve results. Private deposits in pesos reach only 14% of GDP (well below the regional average), while the level of credit in % of GDP was in 2007-2017 (to avoid the subsequent crisis period) 3 times lower than the average from Latin America (4 times lower versus Brazil).
- The determination to use this instrument is still not clear enough. this looks so muchin it timing of the rate hikes (where the BCRA seems to act not proactively but reactively -the last 4 increases were announced after the CPI data-) as well as in the signals provided by the economic policy as a whole. In this sense, parallel to the recent rate hikes by the BCRA, other “arms” of economic policy continue to signal that they want to maintain the negative interest rate in real terms to support activity: in fact, while the deposits fall, some lines of credit show significant expansion.
On the deposit side It was observed that non-indexed time deposits have fallen year-on-year (-2.7% real), since the beginning of 2022 (probably the fall would have been even greater if the BCRA had not raised rates). However, it should also be noted that the greatest decline occurred in recent months, despite the repeated rate hikes and in line with the rise in inflation. In this way, Only fixed terms linked to inflation attract, which grow 36% real in 2022 and +22% real in the last 12 months, although they only represent 6/100 pesos deposited in fixed terms.
Regarding the dynamics of credit, the greatest impact of the rate hike is being experienced by individuals. As of March, these loans (56% of the total) accumulated 42 uninterrupted months of real year-on-year decline. It should be remembered that while between August and November 2021 they grew month by month in real terms, since December they have fallen. Personal and credit card loans (46% of the total borrowed by instrument in 2022) reflect this dynamic, which continued in April.
In relation to loans to companies, the distinction between large companies and SMEs is crucial, since in the case of the former, an impact of the rate hike would be seen, but the latter are the engine of recent credit: at the end of In the first quarter, SME credit grew by 22.4% yoy in real terms, while large companies accumulated 11 out of 12 months with year-on-year falls.
This essentially occurs due to the determination of one wing of the economic policy to sustain subsidized credit for this segment: The Ministry of Production (and also, paradoxically, the Central Ministry) has been propping up various lines of credit at negative real rates (some substantially negative, as those promoted by FONDEP). This grows more than 20% real year-on-year and the proportion of SME credit with respect to total credit is almost at historical maximums, which is not a minor figure: more than 9 out of 10 companies in the country are SMEs.
Within these programs of subsidized rates, the Productive Investment Financing Line (LFIP) stands out, the main channel of loans to MiPyMEs according to the BCRA. Until April, 251,874 companies had access, almost half of the total companies in the country according to AFIP data as of Nov-21.
Does the rate hike work?
Finally, for Ecolatina “in terms of interest rates, the economic policy as a whole shows that more than one objective is being pursued (it seeks to sustain the demand for pesos, but trying to limit the impact on credit) and without yet a clear determination (the BCRA is “running from behind”).
“Although cushioning potential negative impacts is logically understandable in terms of any orientation of economic policy, it should also be noted that this minimum weakens even more the signal provided by an instrument (“the” rate) already limited (clouding the limit between the “genuine” demand for credit and the “opportunity” for its negative yields), in a framework in which the recent acceleration of inflation requires determined and forceful actions to re-anchor expectations. it can also lessen the impact on the rate-dollar channel, by continuing to stimulate a path of money creation that can potentially put pressure on the foreign exchange market, and also ultimately harm activity.In this sense, the opposing actions carry the risk of not achieving any of the two proposed objectives”, affirms Ecolatina.
For the consultant, “as long as inflation does not subside, it is clear that the entire scheme will be under pressure. Firstly, because it will be increasingly difficult to achieve the main objective sought, which is to sustain the demand for pesos. Secondly, due to the risk of endogenous issuance, given the increase in the interest that the Central Bank pays for its debt”.
“The virtuous path consists in signaling that the main priority is to prevent the inflationary process from crystallizing in a new higher echelon, and articulating all the measures in that sense behind this end. This would allow inflation expectations to be re-anchored, reduce rates endogenously and thus limit the impact on economic activity”, he concludes.