Argentina’s Central Bank confirmed on Thursday that it will lower interest rates by 300 basic points days before its reduction in the so-called “crawling peg.” The rate change will take effect on Friday, January 31.

“The Board of Directors of the BCRA has decided to reduce the monetary policy rate from 32% to 29% of the annual nominal rate,” read a statement by the board’s chair, Santiago Bausili. “The interest rate on active repos will also be reduced from 36% to 33%.

“The board’s decision is based on consideration on [expected] lower rates of inflation,” it continued.

This new cut means that the monthly effective interest rate, which is the return that banks will receive for their holdings of Liquidity Fiscal Bills, a financial instrument issued by the Treasury, will be cut from 2.7% to 2.4%. Indirectly, this will influence the rates of fixed-term and bank loans. 

In financial circles, the expectation was that the Central Bank would announce a reduction in the reference interest rate, as a new rate of devaluation in the official exchange rate is set to begin on Monday. Two weeks ago, the body revealed that this will drop from 2% to 1% monthly.

That the reduction in the monthly effective interest rate (0.3 percentage point) is more limited than that of the “crawling peg” (a full percentage point) ensures a return that is considerably higher in dollars than in pesos. The government aims to bolster incentives for “carry trade” as a means of driving private debt in foreign currency — which allows the Central Bank to buy foreign currency — and to prevent financial dollars from overheating in the month of February, when there is lower demand for seasonal reasons. 

In the month of January, the spread between the Liquidity Financial Bills and the “crawling peg” was 0.7%. The consulting firm 1816 calculated that if the Central Bank lowered its monetary policy rate by 300 basis points, the spread would rise to 1.4%, which is what ultimately hapened.

Financial agents maintain that a recent temporary reduction in withholdings, conditioned on an advance on the liquidation of agricultural exports, will allow cereal companies to take on commercial debt via pre-financing. Combined with a new “crawling peg” and peso rate, this liquidated money could then be channeled into the financial sector.