Argentina's Central Bank Changes Its Benchmark Interest Rate Amid Economic Crisis

Argentina's central bank said that it will be changing its benchmark interest rate from the previous 28-day LELIQ rate of 133% to reverse the repo rate of 100%, in order to simplify the monetary policy rate.

"Starting tomorrow, its monetary policy interest rate will become the one-day repos rate, a rate that since December 13 was established at 100% annual nominal," the Banco Central de la República Argentina stated on its official website Monday.

"In order to rationalize its liquidity management scheme, the Board of Directors decided to stop carrying out LELIQ tenders in the future, making repos operations its main instrument for absorbing monetary surpluses," it added.

The central bank's announcement follows President Javier Milei taking office on Dec. 10 and making the exchange rate 800 pesos per dollar, compared to the previous rate of 400 pesos per dollar.

Roberto Geretto, economist at Fund Corp, believes that these changes will help reduce the fiscal deficit by pushing banks and savers to invest in treasury bills. However, it could also lead to an increase in the cost of dollars in the foreign exchange market.

Another economist named Pablo Besmedrisnik said that this move could assist in reducing public debt and make breathing space to redirect loans to the companies.

"There will be incentives to redirect funds towards dollarized assets, putting pressure on their prices," Besmedrisnik was quoted as saying by Reuters. "We will have to wait for the reaction."

Maria Castiglioni, director at C&T Asesores Economicos, described it as a "strong bet" by the new administration. However, she added that this "bet only works if the government achieves a financial fiscal balance so it does not have to keep placing debt, or this scenario will be very hard to manage."

Under the supervision of the new chief of the central bank, Santiago Bausili, the bank noted that the "Board of Directors considered it prudent to maintain a minimum interest rate for fixed-term deposits, which it decided to establish, through the Communication A7922, at 110% annual nominal."

Regarding liquidity injections, the central bank said it "will continue to exercise the possibility of carrying out active repos and offering puts on Treasury instruments."

Argentina continues to face high inflation, with an annual rate of 143%.