The Central Bank board decided that the annual benchmark interest rate will be 100%, after making it the same as the one for one-day repo transactions. The government also determined that the minimum annual interest rate for fixed-term deposits will be 110%.
The new rates, announced on Monday and enforced on Tuesday, represent a 33 and 23 percentage point drop, respectively.
The Central Bank also determined that it would stop bidding on 28-day interest-bearing liabilities (LELIQ, by their Spanish acronym). In a press release, they stated that one-day repo transactions will become its main instrument for absorbing monetary surpluses.
During his campaign, President Javier Milei has consistently said that LELIQs are one of the main problems of the Argentine economy.
These decisions come in a context where November’s year-on-year inflation, the last reported figure, hit a record 160.9%, and analysts expect a further increase after last week’s 54% devaluation. The decision puts the peso interest rate well above projected inflation rates. Last week, Economy Minister Luis Caputo said that dollarization and the closing of the Central Bank remain the goals of his economic program.
Juan Manuel Telechea, economist and director of the Germán Abdala Foundation’s Labor and Economics Institute, said that the Central Bank announced a 2% monthly crawling peg to prevent the market from dollarizing its peso surplus after the rate drop. That would signal that the exchange rate is going to remain steady, according to the economist.
“Obviously, this is subject to the [condition that] the market believes in the government and does not go straight to buy dollars,” he said. “Otherwise, financial dollar rates would go up, and the strategy would not be viable.”
Gustavo Quintana, an analyst and broker for PR Corredores de Cambio, said the rate decrease is part of a comprehensive program involving “monetary reorganization.”
“The interest rate is one more factor that may influence inflation. Surely they thought that ‘anchoring’ it at a lower level could reduce expectations,” he told the Herald. He added that rates going down could encourage a search for other kinds of investments, “including the dollarization of savings.”
Pablo Repetto, head of research for Aurum Valores broker, deemed the move “risky.” According to Repetto, the ongoing season is usually high in peso demand, but that changes during the second half of January, when there could be an increase in dollar rates.
“Considering the inflation levels we are going to have and the fact that the [informal] dollar rate is so close to the official one, I think it is too premature and optimistic to send such a signal, assuming the risk of an increase in inflation and dollar rates.”
No more LELIQs
According to Maximiliano Ramírez, former undersecretary of economic planning during Martín Guzmán’s tenure and member of the Suramericana Visión think tank, LELIQ stock was AR$3.3 trillion on Tuesday. AR$1.1 trillion matured at the end of that day. The remaining AR$2.2 trillion will progressively mature until January 11, the day that the financial instrument “will cease to exist,” he said in a post on X.
Telechea told the Herald that the government seeks to force banks to use their surpluses to purchase Treasury bills it will offer on a bid scheduled for Wednesday. According to Telechea, these bills will have a better rate than the one for one-day repo transactions.
Milei gave a hint of what his next steps may look like in response to a post by economist Iván Carrino on X. Carrino stated that if the goal was to replace LELIQs with a Treasury bond, the Treasury should immediately cancel its debt with the Central Bank. “Those pesos should stay in the Central Bank so they don’t end up going ‘to the street’,” he said, to which Milei answered, “Correct.”
However, Ramírez said that not all the LELIQ stock would transfer immediately to repo transactions. Since the interest rate for fixed-term deposits is higher than the LELIQ interest rate, banks would be forced to resort to the Treasury to keep their profit margin.