Monetary Policy Presentation. October 2018 · 2018. 11. 7. · mopping up pesos (upper bound intervention zone). • Complementary action in the case of strong appreciation of the

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Monetary Policy October 2018


Agenda

1 | Recent developments

2 | Monetary plan: framework and implementation

3 | Sustainability

2


1 | Recent developments

3


CPI(m.o.m. % change)

Recent developments

Source | INDEC.

Prices

4

• Monthly inflation has accelerated since June, reaching a very high rate during September.

• Although lower than in September, we still expect a high inflation in October due to the pending pass through of the peso depreciation during August.

6.5

7.6

0

1

2

3

4

5

6

7

8

Jan-

17

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov-

17

Dec-

17

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Headline

Core

%


Recent developments

Note | National coverage CPI linked with the GBA-CPI and the CPI-NP calculated by the BCRA. Source | INDEC.

Prices

5

CPI(y.o.y. % change)

• y.o.y. inflation is high.

• y.o.y. inflation will still be high in the months to come, though monthly inflation rates would start to decrease.

• The inflation rate of regulated prices is above the headline rate due to the adjustments in relative prices.

40.5

27.3

52.5

38.9

0

10

20

30

40

50

60

70

Sep-

16

Nov-

16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov-

17

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep-

18

%

Headline

Seasonal

Regulated

Core


32.9

0

5

10

15

20

25

30

35

40

45

0

2

4

6

8

10

12

14

16

18

Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

%

Expectations Dispersion

12 months Inflation Expectations (average - right axis)

%

Recent developments

Inflation expectations

Inflation expectations

6Source | REM-BCRA.

• At the end of August, inflation expectations rose sharply.

• The dispersion of inflation expectations also increased, reflecting the prevailing uncertainty.

• At the end of September, both series halted their rise after the announcement of the new plan, but are still at high levels.


Recent developments

Nominal Exchange Rate

Exchange rate

7Source | BCRA.

• The sharp increases in inflation and inflation expectations were related to the increase of more than 100% of the US dollar against the peso since April.

• Need to introduce profound changes to reduce uncertainty.

16

20

24

28

32

36

40

44

Jan-

01-1

8

Jan-

17-1

8

Feb-

02-1

8

Feb-

18-1

8

Mar

-06-

18

Mar

-22-

18

Apr-

07-1

8

Apr-

23-1

8

May

-09-

18

May

-25-

18

Jun-

10-1

8

Jun-

26-1

8

Jul-1

2-18

Jul-2

8-18

Aug-

13-1

8

Aug-

29-1

8

Sep-

14-1

8

Sep-

30-1

8

$/US$

May-18:+16.8%

Jun-18:+12.4%

Jul-18:+4.0%

Aug-18:+8.3%

Sep-18:+28.6%


2 | Monetary plan: framework and implementation

8


• Need to recover a nominal anchor.

• Loss of credibility in the BCRA's ability to meet inflation targets.

• Framework based on a tool under direct control of the BCRA.

• Facilitated by the zero primary fiscal deficit and the end of BCRA´s transfers to the Treasury.

• Starting point with a competitive real exchange rate and treasury financial needs already covered.

FrameworkWhy this path?

9


• Monetary aggregate target: 0% growth of the Monetary Base.• Monetary base is a tool under direct control of the BCRA.• Liquidity control limits inflationary acceleration or excessive depreciation.• Very strict and easy to follow-up target to produce an expectation shock.

• Complementary action in the case of excessive depreciation of the peso.• Sign of decrease in the demand of peso assets.• Capacity to implement a greater monetary contraction via intervention in the exchange rate market

mopping up pesos (upper bound intervention zone).

• Complementary action in the case of strong appreciation of the peso.• Sign of confidence and higher demand of pesos.• Capacity to increase monetary base backed with international reserves (lower bound intervention zone).

FrameworkMain topics of the plan

10


Monetary base(monthly average stock)

Framework

Source | BCRA.

Nominal monetary base target

11

• Growth rate of the monthly average of the monetary base equal to 0% until June 2019.

• Seasonal adjustments of the monetary base in December and June, months with higher money demand.

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

$ billion

Jun-19


Monetary base evolution Implementation

Source | BCRA.

Monetary base

12

• The target was met in October (-1.5% m.o.m.)

1,271 1,271

1,252

1,100

1,150

1,200

1,250

1,300

1,350

1,400

Sep-

01Se

p-03

Sep-

05Se

p-07

Sep-

09Se

p-11

Sep-

13Se

p-15

Sep-

17Se

p-19

Sep-

21Se

p-23

Sep-

25Se

p-27

Sep-

29O

ct-0

1O

ct-0

3O

ct-0

5O

ct-0

7O

ct-0

9O

ct-1

1O

ct-1

3O

ct-1

5O

ct-1

7O

ct-1

9O

ct-2

1O

ct-2

3O

ct-2

5O

ct-2

7O

ct-2

9O

ct-3

1

$ billion

RecordedTargetAccumulated average

OctoberSeptember


• The challenge to keep an unchanged monetary base (on average) during October was more demanding due to the mid-September increase in reserve requirements.

• Considering this, the decrease was equivalent to one of $54.7 billion.

Evolution of the monetary base Implementation

Source | BCRA.

13

Monetary base(October vs. September)

1,2711,307

1,252

1,000

1,100

1,200

1,300

1,400

1,500

Recorded Adjusted by reserverequirements

Recorded

September October

$ billion

$ -54.7 B-4.2%

$ -18.7 B-1.5%


• LELIQ daily auctions to meet monetary base target.

• The interest rate is set by the market.

NV | Nominal value. Note: *Includes the auction of LEBAC of 10/16/18Source | BCRA.

LELIQ auctions: size and rates Implementation

LELIQ Auctions

14

72.00%

74.04% 74.10% 74.00% 73.99% 73.92% 73.90%

72.01%

72.75%72.50%

70.90%

69.99%

67.18%

71.27%

73.31%

72.60%

72.73%72.20%

72.54%

71.73% 71.87%71.76%

70.05%

68.05%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

65%

66%

67%

68%

69%

70%

71%

72%

73%

74%

75%

Oct

-01-

18

Oct

-02-

18

Oct

-03-

18

Oct

-04-

18

Oct

-05-

18

Oct

-08-

18

Oct

-09-

18

Oct

-10-

18

Oct

-11-

18

Oct

-12-

18

Oct

-16-

18

Oct

-17-

18

Oct

-18-

18

Oct

-19-

18

Oct

-22-

18

Oct

-23-

18

Oct

-24-

18

Oct

-25-

18

Oct

-26-

18

Oct

-29-

18

Oct

-30-

18

Oct

-31-

18

million (NV $)ANR

Due amount Allocated amount ($) Maximum ANR allocated Average rate


Evolution of interest rates Implementation

15

Time deposits interest rates

*Private Banks.Source | BCRA.

• Time deposit interest rates increased due to catch up to LELIQ’s interest rate and to regulatory incentives implemented at the beginning of October.

• Bank competition for time deposits was fostered by changing reserve requirements.

51.5053.50

47.95

0

10

20

30

40

50

60

70

2-Ja

n-18

23-Ja

n-18

13-F

eb-1

8

6-M

ar-1

8

27-M

ar-1

8

17-A

pr-1

8

8-M

ay-1

8

29-M

ay-1

8

19-Ju

n-18

10-Ju

l-18

31-Ju

l-18

21-A

ug-1

8

11-S

ep-1

8

2-Oc

t-18

23-O

ct-1

8

BADLAR*

TM20*

Plazo fijo 30 días

31-o

ct-1

8

%


20

25

30

35

40

45

50

55

60

Apr-

01-1

8

Apr-

29-1

8

May

-27-

18

Jun-

24-1

8

Jul-2

2-18

Aug-

19-1

8

Sep-

16-1

8

Oct

-14-

18

Nov-

11-1

8

Dec-

09-1

8

Selling zone

Buying zone

Non-intervention zone

Dec-

31-1

8

$/US$

35.1

45.4

Nov

-01-

18

44.0

34.0

41.3

35.7

FX intervention and non-intervention zones Implementation

16Source | BCRA.

• The non-intervention zone began on October 1st between 34 and 44 pesos per dollar.

• It is updated on a daily basis, at a monthly growth rate of 3%.

• The peso appreciated in the first weeks of the new plan.


ImplementationEmerging currencies

Source | Bloomberg.

17

• The peso performance has diverged from that of other emerging market currencies.


3 | Sustainability

18


• Competitive real exchange rate.• The design of the non-intervention zone is consistent with external competitiveness.

• Zero transfers from the BCRA to the Treasury.• The 2019 fiscal balance and the 2020 surplus guarantee zero transfers to the Treasury

for the next years.

• Stronger balance sheet of the BCRA.• The path of BCRA’s interest-bearing liabilities is consistent over time.

SustainabilityInitial conditions

19


SustainabilityCompetitive real exchange rate

Effective real exchange rate

Source | BCRA.

20

• The monetary plan begins with a competitive real exchange rate.

• It’s at 2010 levels.

50

70

90

110

130

150

170

190

210

230

Jan-

01-0

1

Jan-

01-0

2

Jan-

01-0

3

Jan-

01-0

4

Jan-

01-0

5

Jan-

01-0

6

Jan-

01-0

7

Jan-

01-0

8

Jan-

01-0

9

Jan-

01-1

0

Jan-

01-1

1

Jan-

01-1

2

Jan-

01-1

3

Jan-

01-1

4

Jan-

01-1

5

Jan-

01-1

6

Jan-

01-1

7

Jan-

01-1

8

Upper bound non-intervention zone (up to Nov-01-18)

Lower bound non-intervention zone (up to Nov-01-18)

118,2

153,1

120,3

Dec-17-15=100

Nov

-01-

18


• A more competitive exchange rate reduced individuals and firms’ FX demand.

Demand for dollars moderates Sustainability

Net daily purchases in the fx market2018. 20-day moving average.

21Source | BCRA.

15

18

21

24

27

30

33

36

39

42

-20

0

20

40

60

80

100

120

140

160

180

Jan-

02

Jan-

23

Feb-

13

Mar

-06

Mar

-27

Apr-

17

May

-08

May

-29

Jun-

19

Jul-1

0

Jul-3

1

Aug-

21

Sep-

11

Oct

-02

Oct

-23

$/US$US$ million

Non agricultural firmsIndividuals' savingsTourismExchange rate (right scale)

Oct

-31


Transfers to the Treasury

Fiscal balance and monetary base growth

22Source | BCRA.

Sustainability

• Monetary base zero growth rate permitted by end of transfers from the BCRA to the Treasury.

• These transfers contributed in the past to the LEBAC growth.

2.9%

1.8%1.4%

0.2%0.0%

1.7%

0%

1%

2%

3%

4%

5%

2015 2016 2017 2018 2019

% of GDP

International Reserves use

Treasury financing (temporary advances and profit transfers)

4.6%


Non-Financial Nacional Public Sector Primary fiscal balance

23

*Does not include 2015 expenses, that were deferred to 2016.f | Forecast.Source | Treasury and INDEC.

Fiscal balance effectiveness Sustainability

• Zero primary fiscal deficit target for next year is key for the consistency of the plan.

• It allows consistent targeting for a zero growth of the monetary base until June of next year.

-3.8 -4.2

-3.8

-2.6

0.0

1.0

-5

-4

-3

-2

-1

0

1

2

2015* 2016 2017 2018f 2019f 2020f

% of GDP


Stock of BCRA interest-bearing liabilities(LEBAC+LELIQ+Reverse Repo)

Low level of BCRA liabilities

24Source | BCRA.

Sustainability

• Interest-bearing liabilities have been reduced even in nominal terms.

• This is a result of the BCRA selling of dollars between April and September.

0

300

600

900

1,200

1,500

Dec-

15

Feb-

16

Apr-

16

Jun-

16

Aug-

16

Oct

-16

Dec-

16

Feb-

17

Apr-

17

Jun-

17

Aug-

17

Oct

-17

Dec-

17

Feb-

18

Apr-

18

Jun-

18

Aug-

18

Oct

-18

Reverse Repos

LELIQ

LEBAC

$ billion1,404

790.7


Stock of interest-bearing liabilities of the BCRA(LEBAC+LELIQ+Reverse Repo)

Low level of BCRA liabilities

25Source | BCRA.

Sustainability

• In an economy with inflation it is even more relevant to compare the evolution of a nominal variable against another nominal variable to capture the real dynamics.

• The drop of interest-bearing liabilities is greater in terms of GDP.

0

2

4

6

8

10

12

Dec-

15

Feb-

16

Apr-

16

Jun-

16

Aug-

16

Oct

-16

Dec-

16

Feb-

17

Apr-

17

Jun-

17

Aug-

17

Oct

-17

Dec-

17

Feb-

18

Apr-

18

Jun-

18

Aug-

18

Oct

-18

Reverse repos

LELIQ

LEBAC

% of GDP

11.2

5.2


0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

10

20

30

40

50

60

70

80

Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18

US$ billion

Interest-bearing liabilities

International reserves

Ratio (right axis)

Oct-18

International reserves vs interest-bearing liabilities

BCRA assets and liabilities relationship

26Source | BCRA.

Sustainability

• The coverage ratio between interest-bearing liabilities and international reserves has more than doubled, as a result of the peso depreciation.


Monetary base8.20 % of GDP

Non-banks LEBAC 7.13 %

of GDP

Banks' LEBAC2.87 % of GDP

LELIQ0.99 % of GDP

Reverse repos0.16 % of GDP

BCRA main liabilities

27

BCRA interest-bearing liabilities: 5.2% of GDP

BCRA interest-bearing liabilities: 11.2% of GDP

Total (April 2018 average)19.4% of GDP

Total (October 2018 average)13.4% of GDP

Source | BCRA.

Sustainability

• BCRA liabilities were reduced (in comparison to April), and non interest-bearing liabilities increased its share (monetary base grows from 42% to 61%).

Monetary base8.22 % of GDP

Non-banks LEBAC

1.55 % of GDP

Banks' LEBAC0.19 % of GDP

LELIQ3.39 % of GDP

Reverse repos0.06 % of GDP


11.2

4.9

6.9

0

2

4

6

8

10

12

Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19

% of GDP

Current

Constant real rate scenario (1.5% EMR)

Constant nominal rate scenario (72% NAR)

Sustainability

Source | BCRA.

BCRA interest-bearing liabilities

Simulation

28

• LELIQ path conditional onalternative assumptions:monthly real rate of 1.5% andan annual nominal rate of 72%.

• In June and December, thenominal monetary base increasesdue to seasonality, and it growsat 1% per month from July 2019.

• LELIQ/GDP remainssignificantly below recent levels,even in an extreme scenario.


Sustainability

Source | BCRA.

Money demand recovery

29

• Progress is made towards 2020 in a scenario that involves a decrease in the nominal interest rate accompanying the disinflation process.

• Conservative assumptions of the increase in the monetary base in 2020 (0.75% monthly, plus seasonality) allow a sharp decrease in the ratio of interest-bearing liabilities to the monetary base.

• In the absence of transfers to the Treasury, the increases in the monetary base must come from the reduction of interest-bearing liabilities. 0

1

2

3

4

5

6

7

8

9

10

11

20

40

60

80

100

120

140

160

Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20

Interest-bearing liabilities / monetary base

Monetary base / GDP (right axis)

% %

Monetary base and interest-bearing liabilities


30

Thank you.

Documents

Monetary Policy Presentation. October 2018 · 2018. 11. 7. · mopping up pesos (upper bound intervention zone). • Complementary action in the case of strong appreciation of the