Another reading of the impact of Argentina Central Bank measures

Ambito Financiero – The recent measures of the Central Bank regarding not accepting the integration of the minimum cash (bank reserves) in pesos corresponding to demand deposits made with Leliq and/or Nobac as of November 1 generated disparate readings.

The technical teams of the Libertad y Progreso Foundation analyzed the possible impacts that differ from the general interpretation.

Argentina 2017 elections According to the entity’s analysis, directed by Agustín Etchebarne, Aldo Abram and Manuel Solanet, the change announced by the BCRA ( Argentina’s Central Bank) that the 10 percentage points of the minimum cash percentage of demand deposits, which so far are integrated with Leliqs and / o Nobacs, must be constituted in pesos will imply that:

1- The BCRA may cancel the Leliq that are no longer demanded by issuing pesos. In this way, banks will begin to integrate the 10 percentage points in pesos (instead of Leliq) of mandatory rate, that is, they are forced to demand the pesos already issued by the BCRA. Therefore, this greater supply of currency will not cause the value of it to be depreciated and, therefore, will have no exchange or inflationary impact.

2 –  The BCRA will reduce its remunerated liabilities and, also, the quasi-fiscal cost of interest payments.

3 – If the amount of Leliq canceled with issuance is the same that will be demanded by banks to establish reserve requirements, there should be no increase in credit; Therefore, for this reason, there would be no lower fees.

4 – In fact, as entities must maintain a greater proportion of sight deposits held in the BCRA without remuneration, the cost of intermediation will increase. Since not everything can be transferred to policyholders, part will become a reduction in passive rates (to savers). However, that does not mean a drop in rates as some say; since the cost of credits will increase.

5 – Given the drop in rates to depositors, we will have less credit available from the other side; which is compatible with the lower demand for the increase in the rate of bank loans.

6 – There could be a drop in demand and the value of the peso that impacts on the exchange rate and prices, given that there would be some reduction in the preference for making deposits in banks and those withdrawals will not be demanded as current.

7 – This way of canceling Leliq by issuing without generating an impact on the value of the peso by forcing the financial system that demands it will surely deepen in the future

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