Interest rate, banks and Javier Milei’s move: how much more can the blue dollar rise

He Bank Central of the Argentine Republic (BCRA) lowered the interest ratehe Dolar blue continues to rise, sovereign bonds and Argentine stocks fell in price and country risk skyrocketed. A combination of factors is occurring that alerts the average Argentine, and if not contained in time, it could be a severe headache for Javier Milei.

What is expected when inflation is going down is that the interest rate rise so that people save and not spend that money on consumption. Consumption would imply price acceleration. However, the Executive must untangle a more complex situation; and therefore, he resorted to the opposite strategy.

The Government wants to clean up the accounts of the Bank Central to get out of the trap. Although money was stopped being issued, the Leliqs ball generated – interest on interest granted to the banks so that they deposit a greater amount of reserves – led to a large amount of Argentine pesos being previously issued, which now need to be reabsorbed to avoid inflation and that, in the event of a possible lifting of the reserve, people do not run to buy Dollars with that excess of circulating silver.

The Central Bank of the Argentine Republic. Photo: NA

In this sense, the economist and director of C&T consultants, María Castiglione, explained: “Even if you do not generate new flow and have taken out some of those pesos, if you still have many liabilities and increase the interest rate, the rate at which they continue to increase – the Leliqs to be disarmed – is very high. It is still missing and in a context of low inflation, if you want to open up, you still have a lot of pesos that are a potential risk. So, that combination of things made the Bank Central was lowering the interest rate to the extent that inflation was falling, to the extent that people believe that inflation will continue to fall, to the extent that the demand for pesos stabilizes, and to the extent that they want to speed up the balance to open the stocks”.

As a domino effect, as the interest rateArgentines turned to other assets that are becoming more profitable, one of them is the Dolar blue, which was also ironed. Due to the law of supply-demand, the price rose and continues to rise. Until when is the great unknown.

What about the banks?

During the Congress of the Argentine Institute of Finance Executives (IAEF), the Minister of Economy, Luis Caputo, suggested to banks that they stop taking the interest rate monetary policy for your commercial strategy and look at the LECAPS rate, the new National Treasury bills.

The fine print of this request is that ordinary Argentines stop leaning towards the dollar and save again in fixed terms. Thus, a balance point would be found and no variable would be triggered. The Government tells the banks that the interest rate that the BCRA sets is a reference, but the rate is set by supply and demand, which suggests that they pay a rate depending on their own demand and supply. It frees them to operate however they want.

Now, as he was able to know MDZthere is little request for loans and the banks They are desperate because they have money and nowhere to put it to work to generate interests. Why are they going to raise the interest rate of deposits and encourage people to give you their savings?

The Government’s policy is to continue lowering the interest rate to the extent possible and continue dismantling the Leliqs to achieve fiscal balance in the BCRA accounts. Therefore, Caputo has a limited field of action.

The Minister of Economy, Luis Caputo. Photo: Archive/MDZ

“The problem with banks is that they to pay the interest rates higher in fixed terms, they in turn need to have more rate either from the passive repos or the Treasury bills that you buy. So, it’s a little difficult to tell the banks that go up when at the same time they are going down rate where banks get their income from. It is demanding or asking them to pay more cash,” he analyzed in dialogue with MDZAlfredo Schclarek Curutchet, economist specialized in macroeconomics and monetary economics

Blue dollar: can it continue to rise?

Regarding the quote of the Dolar blue and whether it can continue to escalate, economists differ on what might happen. Schclarek Curutchet warned about the impact of political issues on the market: “The main problem is that there are doubts about the Government’s macroeconomic program, about its sustainability. There are also many doubts regarding the exchange rate delay and whether there has to be a greater depreciation of the dollar“.

And he added: “The rise of blue responds to the decline in interest rate, but also to the inflationary issue, which for me, the Government does not have as much control as it claims to have. These days, we are seeing that food prices have risen quite a bit. There is also the fight with Spain, which does not give peace of mind. “There are also doubts about the renewal of the swap with China, which if it does not happen would be terrible.”

In this order, he saw as the best possible anchor, that the Bank Central raise the interest rateif between this Thursday and tomorrow, Friday, the situation does not normalize and tends to transform into an exchange rate run.

The blue dollar continues to rise. Photo: Archive/MDZ

On the other hand, Castiglione expressed: “The only thing that would worry me is that this continues to rise every day, because then, the common citizen begins to worry. However, for the rise to persist there must be a factor that explains it and Today I don’t see it. I don’t see it either monetarily or fiscally. The inflation data is giving us below 5%, which is a super positive data to the extent that that begins to take shape, let’s say the dynamics of exchange rate delay is relativized. “.

And he added: “Now that in the short term it can happen – in reference to the purchase of Dollars-, but there is not enough floor to justify a large run. In fact, the amount of pesos is shrinking. There may be an accommodation in the banks’ mutation process of having silver in the Bank central to placing it in Treasury bonds. In this transition the banks have lowered the rate a lot.”

At the moment, the banks are not expected to give in nor is there an anchor that the government of Javier Milei going to pull to contain the price of the Dolar blue. It remains to wait for “the invisible hand of the market to act.” Meanwhile, sovereign bonds suffered a new drop this Thursday that caused the country risk to escalate to 1,429 basis points. The highest value since the beginning of April.

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