​Central Bank painkillers

ARGENTINA - In Brief 18 May 2018 by Esteban Fernández Medrano

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Over the last months, we have been pointing out in our reports about the risky monetary arithmetic the Central Bank has been implementing in its fight against inflation. In short, how it has been sterilizing significant peso emissions caused by the government's dollar debt placement to finance an unyielding fiscal deficit. This eventually generated a large stock of short term Central Bank debt (LEBACs, LELIQs and Repos) which has now reached a scale in which the market starts to feel uncomfortable about the monetary authority´s ability to roll it over. The perceived risk of sizeable re-monetization and therefore depreciation pressures on the peso, in a potentially less benign international environment, has peaked. Or put differently, there has been a general reassessment of the underlying risk of the peso carry trade, causing a flight to the dollar. The central bank reaction to this market turbulence has been strong and in line with the books. It hiked the average reference rate to 40% (an unpreceded level since the early 2000 devaluation, with an active overnight repo rate at 57%) and offered USD 5bn in the FX market at 25 AR$/US$ to signal that it does not want the peso above that level, at least not without putting a fight. This message has been quite effective in the short term. This week's LEBAC auction ended with sufficient demand to roll over the outstanding stock. Which was generally celebrated by the monetary authority as a sign that the run on the currency is over. But as efficient it might be in the short term (note yet that today the market tested again the 25 peso per dollar “ceiling” and the BCRA offered once more USD 5bn to sue the markets, still closing...