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Central Bank launches note to attract USD

A worker cleans the window of a currency exchange billboard in Buenos Aires City.

Interest rates increase as monetary authority tries to keep cash in financial system

On the back of last week’s major devaluation and the opening up of the restrictions on foreign exchange, the government is moving forward with efforts to capture more cash in the financial system by trying to present attractive options for both those who will be buying dollars and others who for one reason or another cannot access the legal exchange market.

To help promote the new system of dollar sales, the Central Bank launched a Lebac note to try to attract dollar notes in the market that will pay 4 percent annually for banks that subscribe to that instrument, which can only be done using money from fixed rate deposits held in foreign currency.

In order to receive the rate, banks will have to offer their clients an annual rate of 3.4 percent for their one-year deposits. Considering that until last week the most customers could hope for in a dollar-denominated fixed-rate deposit was 0.5 percent, the new rate marks an increase of almost seven times.

The government has said that those who buy dollars under the new system but keep them in the bank for one year will be exempt from paying a 20-percent surcharge on the exchange, the higher interest rates are a clear incentive to try to keep the cash inside the banking system.

And the Central Bank is not just worried about dollars, it is also continuing its policy of increasing interest rates to make fixed-rate deposits — the traditional saving mechanism of middle class families — more attractive.

On Friday, the Central Bank announced an increase of six points in the notes with which it absorbs the pesos that are circulating in the market. Analysts expect this means that banks will increase the interest rates in fixed-rate deposits by around two additional points above the 23 percent they are currently paying.

Yet economists consulted by the Herald said these rates were likely not enough, suggesting the Central Bank needs to increase interest rates further if it hopes to have the desired effect in the economy.

“The interest rate for fixed-rate deposits should rise much more, going above 30, reaching close to 40 percent,” Eric Ritondale, an economist at the Econviews consultancy, told the Herald.

It is a difficult calculation though because raising interest rates too far can quickly lead to a recession. If the Central Bank were to increase interest rates by more than 30 percent, it could encourage people to save rather than spend, which would at least theoretically cause inflation and the “blue” dollar to recede.

The policy behind the Central Bank’s recent interest rate rises was to prop up the local currency by devising incentives that could push back against devaluating pressures, Ernesto Mattos, an economist with the Arturo Jauretche Foundation said.

“This means there could be less consumption in order to stabilize the currency,” he added.

Surprise incentive

Another incentive that was offered in the AFIP national tax bureau’s relaxed exchange controls yesterday in order to further convince workers to keep their dollars in banks and not put them under the mattress was the elimination of the AFIP’s 20 percent tax for savers exchanging pesos for dollars.

The government proposes that for those people who keep their dollars in their bank accounts for at least 365 days, they will not be subjected to the 20 percent tax and will receive a real exchange rate.

However, despite attractive interest rates, several economists were skeptical that Argentines would be willing to keep the cash in the bank.

“Although the risk of losing those dollars doesn’t exist like it did in 2001, Argentines psychologically reject this measure,” said Econométrica economist Ramiro Castiñeira.

Herald staff

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