Argentina Sets Seven-Day Rate as Benchmark for Inflation Battle

  • Central bank to announce new rate each Tuesday at 5 p.m.
  • Bank sets inflation target of 12%-17% for 2017: Sturzenegger

Argentina’s central bank said it will begin to use a seven-day rate as its main monetary policy tool as it looks to bring inflation down to below 17 percent in 2017, the bank’s president, Federico Sturzenegger, said Monday.

The rate, to be set by a six-person board led by Sturzenegger and announced each Tuesday at 5 p.m., will replace 35-day Lebac notes as the bank’s key rate. The bank also officially announced an inflation target for 2017 of 12 percent to 17 percent, while setting a goal of 8 percent to 12 percent for 2018 and 3.5 percent to 6.5 percent for 2019. Inflation has reached as high as 47 percent this year.

“On January 1 we’re switching off 35 days and turning on 7 days,” Sturzenegger said. The move will give “more stability in the reference price for the financial sector.”

Argentina is trying to bring its financial system more into line with most inflation-targeting central banks worldwide in order to boost investor confidence and pull the economy out of a yearlong recession. Under former President Cristina Fernandez de Kirchner, the previous government targeted the peso, rather than inflation, through currency restrictions and price controls.

The use of the seven-day rate represents a gradual move toward meeting international monetary policy methods, said Fausto Spotorno, chief economist at Orlando Ferreres & Asociados. They probably avoided using an overnight rate in order to avoid making too much noise in the one-day market, he said.

Argentina’s 35-day Lebac rate is currently 26.75 percent, compared with Brazil’s overnight rate of 14.25 percent, Colombia’s 7.75 percent and the key rate of 4.25 percent in Mexico and Peru. The central bank raised rates to as high as 38 percent in March as part of its battle to slow annual inflation.

Inflation accelerated this year after President Mauricio Macri freed up trading in the peso, allowing the currency to devalue, and reduced subsidies on utility bills. Still, prices gained just 0.2 percent in August, partly as a result of a fall in gas bills after the Supreme Court ordered the government to reverse earlier increases. The government says that without that ruling, prices would have risen 0.9 percent, compared with 2 percent in July.

The central bank will continue to auction Lebac notes, maturing on the third Wednesday of each month, Sturzenegger said. Longer-term notes will be handled by the Finance Ministry. Lebacs currently have seven different maturities ranging from 35 days to 252 days.

The bank will limit its transfers to the Treasury to 150 billion pesos ($9.9 billion), representing a reduction to 1.5 percent of gross domestic product from 2.1 percent in 2016, Sturzenegger said.

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