[PPT] - Monetary Policy Octo ber 2018 BCRA | BCRA | BCRA | BCRA | BCRA

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Monetary Policy

October 2018

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Agenda

1 | Recent developments 2 | Monetary plan: framework and implementation 3 | Sustainability

2

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1 | Recent developments

3

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CPI (m.o.m. % change)

Recent developments

Source | INDEC.

Prices

4

Monthly inflation has

accelerated since June, reaching a very high rate during September.

Although lower than in

September, we still expect a high inflation in October due to the pending pass through of the peso depreciation during August.

6.5 7.6 1 2 3 4 5 6 7 8 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Headline Core %

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Recent developments

Note | National coverage CPI linked with the GBA-CPI and the CPI-NP calculated by the BCRA. Source | INDEC.

Prices

5 CPI (y.o.y. % change)

y.o.y. inflation is high.
y.o.y. inflation will still be high

in the months to come, though monthly inflation rates would start to decrease.

The inflation rate of regulated

prices is above the headline rate due to the adjustments in relative prices.

40.5 27.3 52.5 38.9 10 20 30 40 50 60 70 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 % Headline Seasonal Regulated Core

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32.9 5 10 15 20 25 30 35 40 45 2 4 6 8 10 12 14 16 18 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 % Expectations Dispersion 12 months Inflation Expectations (average - right axis) %

Recent developments

Inflation expectations

6

Source | REM-BCRA.

At the end of August, inflation

expectations rose sharply.

The dispersion of inflation

expectations also increased, reflecting the prevailing uncertainty.

At the end of September, both

series halted their rise after the announcement of the new plan, but are still at high levels.

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Recent developments

Nominal Exchange Rate

Exchange rate

7

Source | BCRA.

The sharp increases in inflation

and inflation expectations were related to the increase of more than 100% of the US dollar against the peso since April.

Need to introduce profound

changes to reduce uncertainty.

16 20 24 28 32 36 40 44 Jan-01-18 Jan-17-18 Feb-02-18 Feb-18-18 Mar-06-18 Mar-22-18 Apr-07-18 Apr-23-18 May-09-18 May-25-18 Jun-10-18 Jun-26-18 Jul-12-18 Jul-28-18 Aug-13-18 Aug-29-18 Sep-14-18 Sep-30-18 $/US$ May-18: +16.8% Jun-18: +12.4% Jul-18: +4.0% Aug-18: +8.3% Sep-18: +28.6%

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2 | Monetary plan: framework and implementation

8

SLIDE 9

Need to recover a nominal anchor.
Loss of credibility in the BCRA's ability to meet inflation targets.
Framework based on a tool under direct control of the BCRA.
Facilitated by the zero primary fiscal deficit and the end of BCRA´s transfers

to the Treasury.

Starting point with a competitive real exchange rate and treasury financial

needs already covered.

Framework Why this path?

9

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Monetary aggregate target: 0% growth of the Monetary Base.
Monetary base is a tool under direct control of the BCRA.
Liquidity control limits inflationary acceleration or excessive depreciation.
Very strict and easy to follow-up target to produce an expectation shock.
Complementary action in the case of excessive depreciation of the peso.
Sign of decrease in the demand of peso assets.
Capacity to implement a greater monetary contraction via intervention in the exchange rate market

mopping up pesos (upper bound intervention zone).

Complementary action in the case of strong appreciation of the peso.
Sign of confidence and higher demand of pesos.
Capacity to increase monetary base backed with international reserves (lower bound intervention zone).

Framework Main topics of the plan

10

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Monetary base

(monthly average stock)

Framework

Source | BCRA.

Nominal monetary base target

11

Growth rate of the monthly

average of the monetary base equal to 0% until June 2019.

Seasonal adjustments of the

monetary base in December and June, months with higher money demand.

500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 $ billion Jun-19

SLIDE 12

Monetary base evolution Implementation

Source | BCRA.

Monetary base 12

The target was met in October

(-1.5% m.o.m.)

1,271 1,271 1,252

1,100 1,150 1,200 1,250 1,300 1,350 1,400 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Sep-17 Sep-19 Sep-21 Sep-23 Sep-25 Sep-27 Sep-29 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Oct-19 Oct-21 Oct-23 Oct-25 Oct-27 Oct-29 Oct-31 $ billion Recorded Target Accumulated average October September

SLIDE 13

The challenge to keep an

unchanged monetary base (on average) during October was more demanding due to the mid-September increase in reserve requirements.

Considering this, the decrease

was equivalent to one of $54.7 billion.

Evolution of the monetary base Implementation

Source | BCRA.

13 Monetary base

(October vs. September) 1,271 1,307 1,252 1,000 1,100 1,200 1,300 1,400 1,500 Recorded Adjusted by reserve requirements Recorded September October $ billion $ -54.7 B

4.2%

$ -18.7 B

1.5%

SLIDE 14

LELIQ daily auctions to meet

monetary base target.

The interest rate is set by the

market.

NV | Nominal value. Note: *Includes the auction of LEBAC of 10/16/18 Source | BCRA.

LELIQ auctions: size and rates Implementation

LELIQ Auctions 14

72.00% 74.04% 74.10% 74.00% 73.99% 73.92% 73.90% 72.01% 72.75% 72.50% 70.90% 69.99% 67.18% 71.27% 73.31% 72.60% 72.73% 72.20% 72.54% 71.73% 71.87%71.76% 70.05% 68.05%

50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 65% 66% 67% 68% 69% 70% 71% 72% 73% 74% 75% Oct-01-18 Oct-02-18 Oct-03-18 Oct-04-18 Oct-05-18 Oct-08-18 Oct-09-18 Oct-10-18 Oct-11-18 Oct-12-18 Oct-16-18 Oct-17-18 Oct-18-18 Oct-19-18 Oct-22-18 Oct-23-18 Oct-24-18 Oct-25-18 Oct-26-18 Oct-29-18 Oct-30-18 Oct-31-18 million (NV $) ANR Due amount Allocated amount ($) Maximum ANR allocated Average rate

SLIDE 15

Evolution of interest rates Implementation

15 Time deposits interest rates

*Private Banks. Source | BCRA.

Time deposit interest rates

increased due to catch up to LELIQ’s interest rate and to regulatory incentives implemented at the beginning

f October.
Bank competition for time

deposits was fostered by changing reserve requirements.

51.50 53.50 47.95 10 20 30 40 50 60 70 2-Jan-18 23-Jan-18 13-Feb-18 6-Mar-18 27-Mar-18 17-Apr-18 8-May-18 29-May-18 19-Jun-18 10-Jul-18 31-Jul-18 21-Aug-18 11-Sep-18 2-Oct-18 23-Oct-18 BADLAR* TM20* Plazo fijo 30 días 31-oct-18 %

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20 25 30 35 40 45 50 55 60 Apr-01-18 Apr-29-18 May-27-18 Jun-24-18 Jul-22-18 Aug-19-18 Sep-16-18 Oct-14-18 Nov-11-18 Dec-09-18

Selling zone Buying zone Non-intervention zone

Dec-31-18 $/US$ 35.1 45.4 Nov-01-18 44.0 34.0 41.3 35.7

FX intervention and non-intervention zones Implementation

16

Source | BCRA.

The non-intervention zone

began on October 1st between 34 and 44 pesos per dollar.

It is updated on a daily basis,

at a monthly growth rate

f 3%.
The peso appreciated in the

first weeks of the new plan.

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Implementation Emerging currencies

Source | Bloomberg.

17

The peso performance has

diverged from that of other emerging market currencies.

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3 | Sustainability

18

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Competitive real exchange rate.
The design of the non-intervention zone is consistent with external competitiveness.
Zero transfers from the BCRA to the Treasury.
The 2019 fiscal balance and the 2020 surplus guarantee zero transfers to the Treasury

for the next years.

Stronger balance sheet of the BCRA.
The path of BCRA’s interest-bearing liabilities is consistent over time.

Sustainability Initial conditions

19

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Sustainability Competitive real exchange rate

Effective real exchange rate

Source | BCRA.

20

The monetary plan begins

with a competitive real exchange rate.

It’s at 2010 levels.

50 70 90 110 130 150 170 190 210 230 Jan-01-01 Jan-01-02 Jan-01-03 Jan-01-04 Jan-01-05 Jan-01-06 Jan-01-07 Jan-01-08 Jan-01-09 Jan-01-10 Jan-01-11 Jan-01-12 Jan-01-13 Jan-01-14 Jan-01-15 Jan-01-16 Jan-01-17 Jan-01-18 Upper bound non-intervention zone (up to Nov-01-18) Lower bound non-intervention zone (up to Nov-01-18)

118,2 153,1 120,3

Dec-17-15=100 Nov-01-18

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A more competitive exchange

rate reduced individuals and firms’ FX demand.

Demand for dollars moderates Sustainability

Net daily purchases in the fx market

2018. 20-day moving average.

21

Source | BCRA.

15 18 21 24 27 30 33 36 39 42

20

20 40 60 80 100 120 140 160 180 Jan-02 Jan-23 Feb-13 Mar-06 Mar-27 Apr-17 May-08 May-29 Jun-19 Jul-10 Jul-31 Aug-21 Sep-11 Oct-02 Oct-23 $/US$ US$ million Non agricultural firms Individuals' savings Tourism Exchange rate (right scale) Oct-31

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Transfers to the Treasury

Fiscal balance and monetary base growth

22

Source | BCRA.

Sustainability

Monetary base zero growth rate

permitted by end of transfers from the BCRA to the Treasury.

These transfers contributed in

the past to the LEBAC growth.

2.9% 1.8% 1.4% 0.2% 0.0% 1.7% 0% 1% 2% 3% 4% 5% 2015 2016 2017 2018 2019 % of GDP

International Reserves use Treasury financing (temporary advances and profit transfers)

4.6%

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Non-Financial Nacional Public Sector Primary fiscal balance 23

*Does not include 2015 expenses, that were deferred to 2016. f | Forecast. Source | Treasury and INDEC.

Fiscal balance effectiveness Sustainability

Zero primary fiscal deficit

target for next year is key for the consistency of the plan.

It allows consistent targeting

for a zero growth of the monetary base until June

f next year.
3.8
4.2
3.8
2.6

0.0 1.0

5
4
3
2
1

1 2 2015* 2016 2017 2018f 2019f 2020f % of GDP

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Stock of BCRA interest-bearing liabilities

(LEBAC+LELIQ+Reverse Repo)

Low level of BCRA liabilities

24

Source | BCRA.

Sustainability

Interest-bearing liabilities have

been reduced even in nominal terms.

This is a result of the BCRA

selling of dollars between April and September.

300 600 900 1,200 1,500 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Reverse Repos LELIQ LEBAC $ billion 1,404 790.7

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Stock of interest-bearing liabilities of the BCRA

(LEBAC+LELIQ+Reverse Repo)

Low level of BCRA liabilities

25

Source | BCRA.

Sustainability

In an economy with inflation

it is even more relevant to compare the evolution

f a nominal variable against

another nominal variable to capture the real dynamics.

The drop of interest-bearing

liabilities is greater in terms

f GDP.

2 4 6 8 10 12 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Reverse repos LELIQ LEBAC % of GDP 11.2 5.2

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 10 20 30 40 50 60 70 80 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 US$ billion Interest-bearing liabilities International reserves Ratio (right axis) Oct-18

International reserves vs interest-bearing liabilities

BCRA assets and liabilities relationship

26

Source | BCRA.

Sustainability

The coverage ratio between

interest-bearing liabilities and international reserves has more than doubled, as a result of the peso depreciation.

SLIDE 27

Monetary base 8.20 % of GDP Non-banks LEBAC 7.13 %

f GDP

Banks' LEBAC 2.87 % of GDP LELIQ 0.99 % of GDP Reverse repos 0.16 % of GDP

BCRA main liabilities

27

BCRA interest-bearing liabilities: 5.2% of GDP BCRA interest-bearing liabilities: 11.2% of GDP

Total (April 2018 average) 19.4% of GDP Total (October 2018 average) 13.4% of GDP

Source | BCRA.

Sustainability

BCRA liabilities were reduced

(in comparison to April), and non interest-bearing liabilities increased its share (monetary base grows from 42% to 61%).

Monetary base 8.22 % of GDP Non-banks LEBAC 1.55 % of GDP Banks' LEBAC 0.19 % of GDP LELIQ 3.39 % of GDP Reverse repos 0.06 % of GDP

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11.2 4.9 6.9 2 4 6 8 10 12 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 % of GDP Current Constant real rate scenario (1.5% EMR) Constant nominal rate scenario (72% NAR)

Sustainability

Source | BCRA.

BCRA interest-bearing liabilities

Simulation

28

LELIQ path conditional on

alternative assumptions: monthly real rate of 1.5% and an annual nominal rate of 72%.

In June and December, the

nominal monetary base increases due to seasonality, and it grows at 1% per month from July 2019.

LELIQ/GDP remains

significantly below recent levels, even in an extreme scenario.

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Sustainability

Source | BCRA.

Money demand recovery

29

Progress is made towards 2020

in a scenario that involves a decrease in the nominal interest rate accompanying the disinflation process.

Conservative assumptions of the

increase in the monetary base in 2020 (0.75% monthly, plus seasonality) allow a sharp decrease in the ratio of interest-bearing liabilities to the monetary base.

In the absence of transfers

to the Treasury, the increases in the monetary base must come from the reduction of interest- bearing liabilities.

1 2 3 4 5 6 7 8 9 10 11 20 40 60 80 100 120 140 160 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Interest-bearing liabilities / monetary base Monetary base / GDP (right axis) % %

Monetary base and interest-bearing liabilities

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Monetary Policy Octo ber 2018 BCRA | BCRA | BCRA | BCRA | BCRA | - - PowerPoint PPT Presentation

Monetary Policy

October 2018

Agenda

1 | Recent developments 2 | Monetary plan: framework and implementation 3 | Sustainability

1 | Recent developments

2 | Monetary plan: framework and implementation

3 | Sustainability

Thank you.