Argentina changes inflation target methods

Argentina’s central bank will continue to set its policy rate on a weekly basis in 2017 but will no longer tie the rate to short-term Lebac securities, central bank Chief Federico Sturzenegger said on Monday.

The reference rate will now be the seven-day interbank lending rate, which the central bank will determine weekly. Some analysts had expected the central bank to move to monthly monetary policy decisions, as in many developed economies.

‘This will give greater stability to reference rate prices,’ Sturzenegger told reporters.

The bank is seeking to contain inflation that economists see at around 40 percent in 2016, also a priority of center-right President Mauricio Macri, who appointed Sturzenegger and has introduced a number of market-oriented reforms since taking office in December.

The bank will auction off Lebac on the third Wednesday of every month rather than every week, he said. The market currently treats the interest rate on the 35-day debt note as the reference rate, reports CNBC.

Disassociating policy rates from debt issuance is a welcome step as the central bank seeks to normalize its policies, said Federico Furiase, an economist with consultancy Estudio Bein & Asociados in Buenos Aires.

While weekly rate decisions remain abnormal by world standards, regular communication with markets could help the central bank restore credibility, he said.

‘They’re in a process of reconstructing their reputation,’ Furiase said, adding that the assurance Sturzenegger gave that the central bank principal objective was using interest rates to lower inflation, rather than finance fiscal deficits, in itself marked a ‘regime change’ from the previous administration.

Last week, the central bank cut the interest rate on its short-term Lebac securities for the eighth straight week, slashing them by 50 basis points to 26.75 percent, citing indications that inflation was falling as desired. Rates had been as high as 38 percent in May.

Argentina’s central bank will target inflation of 8 percent to 12 percent in 2018, down from a 12 percent to 17 percent target in 2017.

Inflation should fall to around 5 percent in 2019, he said in a presentation to explain the bank’s inflation targeting strategy for next year.