Wednesday, June 3, 2020
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ARGENTINA | 04-03-2020 17:00

Central Bank will continue lowering rates to curb inflation

Central Bank plans to keep reducing its key interest rates further as inflation is expected to decelerate and as a tool to reduce debt costs.

The Central Bank plans to keep reducing its key interest rates further as inflation is expected to slow, according to one person with direct knowledge of the issue. 

The Institution will reduce the floor of the Leliq rate reference – the minimum level at which fees can fall – by two percentage points to 38 percent in a reunion on Thursday, according to the person, who asked not to be identified because the decision is not public yet.

The bank also expects monthly inflation to be under two percent in February, in contrast to 2.3 percent in January, which confirms the deceleration of the prices that opens up space to continue lowering the debt costs. 

Argentina has embarked in a aggressive circle of interest rate reductions since President Alberto Fernández took office on December 10, despite annual inflation exceeding 50 percent. 

The financial institution has cut its policy rate floor by 23 percentage points to 40 percent across seven rate-reduction decisions. 

At the same time, the country has focused on tackling inflation through a so-called “social pact” that includes various price freezes for food and utilities, rather than through the policy rate. 

The Central Bank believes that the government's policy will succeed in significantly curbing inflation this year, according to the person. The institution's press department declined to comment.

In a monetary policy statement last month, the Central Bank justified the rate cuts as a tool to help change Argentina's economy, which is expected to shrink for the third straight year in 2020.

The previous leadership of the Central Bank under former president Mauricio Macri raised rates to 84 percent in a failed attempt to combat inflation.

The Central Bank also is trying to reduce the proportion of Leliq's rates that he pays for his passive passes, reducing them from the current 50 percent to 40 percent, according to the individual. 

Private banks had been using the central bank's repository system to park cash that was not transferred at Leliq's biweekly auctions.

The Central Bank now seeks to discourage private banks from using this instrument to promote more auction activity.

The local newspaper Ámbito Financiero first reported on the upcoming rate cut.

by Patrick Gillespie & Ignacio Olivera Doll, Bloomberg

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