Isidro Guarduccian economist associated with FIEL, pointed out that “interest rates are expected to rise this month, since, on the one hand, Argentina has an agreement with the IMF to keep them positive. Also, with the current inflationary levels, they are becoming increasingly negative, so a new rise seems inevitable. Also, it would make instruments in pesos more attractive, which would take pressure off the demand for dollars and reduce the channels of pressure on reserves. However, it is not clear that the rate hike will end up beating inflation, since, ultimately, the interest rate competes against expected future inflation”.
Alejandro Giacoia, an economist at Econviews, agreed with the analysis. “Depending on the inflation data for May, it is likely that we will see a new rise in the rate. With inflation at these levels the BCRA can’t stay still. Anyway, unless it takes a much more aggressive stance, it’s going to be very difficult for it to beat inflation,” he noted.
The other side of the rate hike exposes a factor to be taken into account, since a higher rise will make the BCRA’s interest account for its debt more bulky. This is explained by Tomás Ruiz Palacios, strategist at Consultatio. Interest-bearing liabilities such as Treasury debt are linked to the interest rate, for every 100 basis points that the rate is increased, the annual interest payments in terms of liabilities are more or less 0.15% of GDP, with which they cannot overshoot the rate to catch up with inflation. Besides that the effects would be pretty meager. I doubt that it can be a guarantee that the dollar will not rise or that inflation will drop sharply, but rather that it will have a moderate effect because the rate hike should be moderate. Also, we must take into account the impact on the activity”.
In this way, Ruiz Palacios adds that the next new rate hike would be more linked to the accumulation of reserves. Since, another key factor is that a rise in the interest rate would allow the BCRA to maintain the official exchange rate parity at a rate closer to inflation and thus avoid the exchange delay experienced by the peso in recent days.
“We heard from various sources that what the IMF was concerned about was the non-accumulation of reserves, and the answer to that was, on the one hand, more stocks and they also linked it with the interest rate. Perhaps in a more indirect way, since with the interest rate they want to lower inflation and thus not appreciate the real exchange rate so much and that this does not harm reserves. Likewise, seeing the evolution of inflation, everything is shaping up for a new rate hike.”
This point is also explained by Adrián Yarde Buller, from Facimex Valores, who pointed out that the BCRA rate hikes were in line with the rate of devaluation of the peso and were not aimed at lowering inflation.
“This year’s rate hikes were not aimed at combating inflation, but aimed at maintaining consistency with the exchange rate policy without accelerating the growth of the quasi-fiscal deficit too much. As the BCRA accelerated the rate of devaluation, it also raised rates to prevent exporters from leveraging and postponing liquidation, making it difficult to accumulate reserves. Currently we do not expect the BCRA to continue accelerating the rate of devaluation above these levels and therefore we are not projecting rate hikes in the short term.”