MNI INTERVIEW: Argentina To Hold Rates Amid IMF Negotiations
MNI (BRASILIA) - The Central Bank of Argentina is likely to keep its interest rate on hold at 29% while it is negotiating with the International Monetary Fund (IMF), former BCRA director and board member Enrique Szewach told MNI, adding that any significant additional monetary easing could hit bond markets.
"Now the central bank has to operate differently because if it sharply lowers the monetary policy rate and the public sector’s borrowing rate, it may struggle to roll over public debt. That would mean more money issuance and more problems," Szewach said in an interview.
The BCRA reduced its rate by 300 basis points in January, though analysts had expected an even larger cut of 400 basis points. It was the ninth cut during the government of President Javier Milei. The board holds meetings every Thursday, and these may or may not produce a monetary move.
In addition to the continuing talks for a crucial IMF loan deal, other reasons for a cautious approach to further easing come from seasonal factors which are likely to push up on inflation in March and the need to accumulate dollars, Szewach said. Inflation picked up slightly on a monthly basis in February, to 2.4%.
"It would be better to wait a little longer to cut rates, because only in April could we see a sharper drop in the inflation rate once this seasonally high period passes. My impression is that the board will take a more conservative approach to the interest rate for now, but obviously, anything could happen."
COUTIOUS BOARD
The former official stressed that the IMF always pushes for a positive real interest rate.
"In the middle of the negotiation, they might be more cautious about handling the interest rate," he said.
The Argentine central bank’s next moves will be closely tied to the agreement with the Fund and the exchange rate regime, according to Szewach.
"I have to emphasize that in Argentina the key adjustment tool is not the interest rate but the exchange rate,” he said. "The capital market in Argentina is very small -- today, bank credit accounts for only 7% of GDP. So, the interest rate doesn’t have much influence on economic activity, inflation control, or expansionary policy.”
Monetary policy does affect portfolio decisions for allocating dollars and pesos, he said, as well as public and private debt issues. "But it’s not the central variable, the key factors are the exchange rate and the exchange rate regime."
Javier Milei's government is negotiating a new exchange rate framework with the IMF, as well as seeking better conditions for its USD40 billion debt and attempting to secure more credit. (See MNI INTERVIEW: 200BP Argentine Rate Cuts Likely By March-Forte)
IMF AGREEMENT
Argentina and the Fund are likely to reach an agreement, which would benefit "both sides,” Szewach said.
"The Fund needs to have its main debtor within the framework of an agreement, and it also needs to be paid. So, the Fund is interested in having this agreement," he said.
"And Argentina needs the agreement not only because it doesn't have negative net reserves, but also because today it doesn’t have access to the voluntary capital market and has to roll over a very large amount of debt maturing in the coming years. The agreement with the Fund is supposed to help lower the country risk rate and thus provide better access to the market."
An agreement would likely see a shift to dirty float scheme, according to Szewach. This would see an end to the current regime of parallel formal and informal exchange rates, with exporters allowed to sell 20% of their dollars at the informal rate, producing a so-called “blend dollar”.
"It seems to me there’s a trade-off between switching to another exchange rate regime and risking inflation, and thus it’s likely that there will be a very gradual convergence process, eventually leading to a float," he said.
Argentina still needs significant reforms, including of its tax system and labor markets, to fortify its economy, according to the former central bank director.