BCRA also takes rates up

In parallel with increase of international rates, Argentine Central Bank (BCRA) has raised yield of passive repo for the fifth consecutive time in the year, moving from 7 per cent to 7.25 per cent annual for one-day term. All the same, sources of the institution have explained that this adjustment "has nothing to do with the international movement, rather we try to have more means to absorb pesos issued for dollar purchase."

Through repo, BCRA obtains really short-term funds from banks, giving bonds as guarantee. At the beginning of 2007, the yield paid to entities for pesos granted hit only 5.75 per cent, but, after consecutive increases, it has climbed to 7.25 per cent.

With a gradual rate increase, the idea is to encourage banks to place funds in BCRA, thus contributing to absorption. Current level of repo barely exceeds ARG$2 billions, but, less than a month ago, it went as far as to touch ARG$7 billions (figure BCRA hopes to reach before the end of the month).

This new rise hit interbank market in a moderate way yesterday. BCRA hopes banks feel encouraged to rise time deposits' rate too. The are two possible ways of avoiding an excessive increase of M2 (currency in circulation plus money in current and savings accounts): one of them is absorbing it through repo or issue of LEBAC and NOBAC (BCRA's Bills of Exchange and Securities), while the other is through growth of time deposits.

"There's great liquidity and the truth is that banks are not interested in struggling to get funding, they have plenty of resources to lend," a BCRA official explained. Therefore, the communicating vessels between BCRA rate increase and financial market operation are not at sight.

Adjustments adopted by BCRA are the following:

One-day passive rate has moved from 7 per cent to 7.25 per cent annual.

Seven-day passive rate: from 7.25 per cent to 7.50 per cent annual.

Seven-day active rate (to lend funds): 9.25 per cent to 9.50 per cent annual.