Megatases of interest are a symptom of weakness

By Hector Rubini USAL Economics Research Institute

The doubts and uncertainties of the week have not subsided. At the second auction of Leliq, the BCRA had to pay up to 63.8% yesterday, an average rate of 63.33%, or nearly 20 points more than there is a month. Despite this, not only has the dollar price not fallen, but it has continued to rise. For the average banks that relieve the BCRA, closed at $ 41.65, or 9.2% more than the level of a month ago. As Professor Juan Carlos de Pablo warned a few days ago, would we approach ineffective "monetary control" interest rate levels to "control" the exchange rate?

The contraction interventions have recently gained firmness since last week and this week, the "bombardment" of the monetary issue of last December was reversing. Although the level of the monetary base is lower than the objective of the BCRA, in accordance with the agreement with the IMF, the contraction of these days has been made at the cost of a rising interest rates and expectations of inflation and depreciation of the peso. . Along with a level of activity that seems to continue to decline and without a firm floor to begin its reversal, demand for pesos is down sharply.

The excess supply of money is clearly the opposite of an inflation that no one expects to go down, even brutally. It would be surprising (and more than welcome) that this afternoon, Indec reported that February's inflation had closed at a level close to 3% or less, rather than 4%, as most economists think so. investors

Future inflation expectations are expected to decrease, but gradually. With the exception of the IMF and the Ministry of Finance, no one in general has an ambition of inflation lower than 25% for the next 12 months. With a realistic minimum inflation expected, around 35% at 12 months, a rate of return of 2.4% for US Treasuries. At one month and with a country risk premium of 748 basis points, the implied rate of the Leliq placed yesterday suggests an implicit expectation of an exchange rate of $ 45.78 per annum. With inflation expected in the United States of around 2.2% at 12 months, this means a predicted 17% real exchange rate lag.

It is clear that the market does not accept that the current nominal exchange rate is compatible with a real long-term equilibrium exchange rate. The latter should be the one that generates the net exports to cancel the services of external debt instruments and to cancel (at least) the debt to the IMF. Something that is not insured with a nominal exchange rate of just over $ 42

Moreover, without any future declines in GDP or the demand for money, the market does not expect an oversupply of dollars or a downward exchange rate, which is also observed in the recent ECR of the BCRA. In order for future exchange rate increases to not be converted into prices, minimum public rate increases must be suspended, prices of commodities, such as fuel and fuel prices, must be de-polarized. put in place a stabilization program that prevents the transfer of costs. increase of the exchange rate to price increases.

Under the program agreed with the IMF, this is not feasible. The instrument of "control" of inflation and exchange rate is the use of Leliq rates. But its effectiveness, through offers absorbing the monetary base, becomes more limited as the interest rate demanded by the market increases.

The validation of this requirement shows that the dynamics of the monetary base and the Leliq is determined by the expectations of the market, and not the opposite. Ergo: The program has lost its meaning in terms of the use of monetary aggregates to control inflation. Secondly, the recurring use of this instrument over the last three weeks occurs when the exchange rate is, believe it or not, in the so-called "non-intervention trading area".

Continuing to increase Leliq rates means that for every monetary amount that we want to absorb, more Leliq is needed in return, as they have to be issued more and more under par. But, like the promises of future issues, the absorption of the monetary base by the current offers is perceived as transitory and the expectation of a future increase of the monetary issue tends to consolidate. If we add to this the forecasts of future increases in tariffs, wages, regulated prices and other adjustable according to past inflation, the upward adjustment of expectations of Inflation is inevitable. The dynamic of last week tends to confirm the fears of Professor Juan Carlos de Pablo.

The behavior of bank deposits is a dangerous counterpart to this bad macroeconomic program. Between the end of February and 11 March, although UVA-adjusted fixed-term private deposits increased by $ 3,728 million, total outstanding private sector deposits in pesos decreased by $ 35,419 million. dollars and that of dollar deposits it increased by 157 million US dollars.

A warning sign that should not be trivialized: it indicates nascent research in the private sector to find savings instruments in dollars and outside banking entities. A dynamic that is beginning to be observed with interest rates returning to November 2018 levels. An indisputable sign of anticipations of inflation and depreciation of the currency that do not yield and which could well begin to weaken the perception of the currency. public sector solvency, as well as the solvency of the banking system.