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Informe Mensual Económico Financiero N° 335 – Enero de 2018

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6

In 2018 fiscal dominant will persist over monetary policy. It is estimated that gross

monetary expansion (before sterilization) will grow 45% and, again, two thirds of

it will have to be sterilized because the demand for money will hardly grow above

25%.

Based on the foregoing, the Lebac will remain in the center of the scene, even in

a more permissive monetary climate. It is possible that the Central Bank will try,

interacting with the Ministry of Finance, to gradually transform the Lebac into

Treasury Bonds. This process requires careful engineering in terms of rates and

terms (the Lebac are shorter and offer high rates). But it would allow covering two

objectives: to control the snowball of the Lebac better (that today already exceeds

the amount of the Monetary Base) and contribute to finance the Treasury.

Treasury financing will be another highlight of 2018: not only do we need to

finance the fiscal deficit (36.0 billion dollars) but also capital repayments for 24.7

billion dollars (excluding the maturities with the Central Bank). This means placing

gross debt at a value between 8% and 10% of GDP, a significant amount even in

a favorable context of international liquidity.

The inflation rate in 2017 would close in 24%; for 2018 year a lower step is

estimated, of around 18–20%. In a context of net cash expansion of 20%–25%,

with adjustments of relative prices in the process of concretion and with

inflationary inertia incorporated to the expectations of the economic agents, a

lower rate is unlikely, especially in a context relatively expansive of the economy.

Precisely, this context of resistance to the decline in the inflation rate explains the

deviation in the fulfillment of the inflation targets in 2017 and the upward

adjustment in the goals for the coming years, and the postponement for a year of

the objective of bringing the inflation rate to 5%, as announced at a press

conference on December 28. It is estimated that this calibration will allow for a

less contractive monetary policy, resulting in lower Lebac interest rates and a

weaker peso (higher devaluation than expected even in the Budget)

Truly, the definitions of the trade union agreements that will take place in February

and March will affect the value of inflation. At the same time, they Hill be greatly

influenced by the impact on prices of tariff adjustments, the transfer to prices of

the jump in the December exchange rate and the effect on expectations of the

perception of a more permissive monetary policy.