President Javier Milei announced this Saturday from Idaho (United States) that on Monday the issuance of pesos will be completely stopped and therefore the monetary base will remain stagnant at the level reached on Friday. The drastic measure includes, it is the novelty of the day, the end of the issuance of pesos to buy dollars and accumulate reserves as much as possible. There will be a brake on the increase in reserves, which is no small thing. This is because all the pesos issued to buy foreign currency on the official market will be sterilized by selling dollars in the legal parallel market, that is, in the so-called “cash with settlement”.
In practice, this means many things.
Government prioritizes turning around inflation, and in that priority the rush to lift the restrictions takes a backseat, since the accumulation of reserves – already quite slow – will be even slower, because part of the dollars purchased by the Central Bank will be sold in the CCL.
In this strategy, The Central Bank will play the exchange rate gap in its favorr. This Friday The official wholesale dollar closed at $921.50 and the dollar counted with liquidation was at $1,429. A gap of 55%This means, for example, that the Central Bank will issue $92.15 billion to buy US$100 million. Then, to sterilize the issued pesos should sell for $64.5 million to recover the $92.150 million. In short, without issuing pesos, it will have added only $36.5 million to reservesThese are the pros and cons of the policy that will be implemented from Monday.
Official sources indicated that rather than a change in exchange rate policy, it is a deepening of monetary policy.
They consider that as long as the cepo exists There is no certainty that this purchase of dollars is a demand for money.is sterilized by selling the purchased dollars.
“There will be fewer dollars, because the Central Bank buys 900 and sells 1,400, meaning that it withdraws the pesos from the market and keeps the net amount of dollars,” they emphasize. And they add: “Pesos will also be withdrawn due to the surplus. In this way, the peso will become the scarce currency.”
On the subject of surplus, it should be remembered that with the elimination of passive repos and their replacement by liquidity bills issued by the Treasury, the Treasury will be responsible for paying the interest accrued on the bills that will be in the hands of the banks. It is estimated that at the current monetary policy interest rate, and considering that repos today amount to 14 trillion pesos, The Treasury will have to collect 600 billion pesos every month to pay the interest on the LeFi.
In other words, The vacuum cleaner speed is set to maximum.
The question is whether this measure may or may not hit the already weak economic activity. The Government does not believe so. They say that the recovery that is taking place through the expansion of credit indicates that the capacity of bank money creation is very broad. “If we reach the point where pesos are lacking, Banks can come and ask the Central Bank for them, given that there is a mountain of pesos from the entities parked in liquidity letters.”
From now on, if the supply of dollars in the cash settlement grows, the price of this financial dollar, which is a reference for companies, will increase. should back off. In theory. And thus narrow the gap, in addition to mitigate the potential impact that the CCL could have on local price formationThis is a point that has been discussed this week, looking at what happened with prices in the first days of July.
Also, if the prospect of CCL plateauing or retreating is believed by the market, Perhaps more dollars will appear from exporters, especially because if there is a shortage of pesos, the interest rate of those who finance themselves in local currency in order not to sell dollars will surely rise.
Another point to bear in mind. If the Government’s strategy is successful in narrowing the gap, the effect of buying some dollars “for free” is reduced. But if the gap is narrowed, the end of the currency control It would be less traumaticthe day that happens.
A new story begins on Monday. Part of phase 2. Inflation is being attacked, and the currency controls will have to wait.