Argentina is set for an increase in issues of corporate bonds linked to Badlar, a reference rate for fixed-term bank deposits, after the central bank hiked its benchmark Leliq interest rate for the first time since November 2020, to slow down inflation and protect the currency.
The Board of the Central Bank of the Argentine Republic (BCRA) on Thursday (Jan. 6) raised the interest rate on 28-day Leliq notes by 2 percentage points to 40% from 38% and increased the Badlar by the same amount to 39% for individuals and 37% for any other depositors, such as companies.
Between November 2019 and March 2020 the Leliq rate was cut 8 times and by a total of 30 percentage points from 68%.
The bank had been weighing a rate hike since last year as inflation in the Latin American country hovers at around 50%. It stood at 51.2% in November, easing from 52.5% in September. Economists surveyed by the monetary authority expect prices to rise 52% this year.
The rate hike also comes after International Monetary Fund (IMF) officials in December said the latest talks with Argentina included discussions on “an appropriate” monetary policy, calling for interest rates that are higher than inflation.
The Washington-based lender and Argentina are in talks over a rescheduling payments on about $42.6 billion in debt that is owned from a 2018 agreement.
“The rate hike is a step in the right direction, but too timid to matter,” Adriana Dupita, an economist with Bloomberg Economics told Bloomberg News.
“The central bank will need to raise the rate further if it intends to use monetary policy to tackle inflation — with or without a deal with the Fund.”
The BCRA which announced it would be redesigning its monetary policy to ensure macroeconomic stability also announced the following measures:
The rate on 28-day Leliq note will continue to be the bank’s benchmark for monetary policy stance. The bank will participate in secondary market for public securities to align the rate structure and guarantee liquidity in these instruments.
BCRA also created a new 180-day Leliq, with the rate set at 44%.
The central bank will progressively eliminate 7-day repo notes and expects price pressures to ease and expectations for the exchange rate to improve in 2022.
“These decisions seek a rearrangement of the interest rate scheme and a simplification of the organization of systemic liquidity,” BCRA said.
Despite the measures, the corporate-bond rally may be short-lived if the central bank does not rein in the exchange rate gap, sources told Latin Finance.
Sources: Bloomberg, Latin Finance, BCRA