As the end of the year and the holiday season quickly approach, the Central Bank seems to have taken a different approach to boost the country’s stagnant economy. Even though there are no signs that inflation is decelerating as fast as the government would want, the Central Bank decreased its interest rates for the fourth week in a row in order to increase consumption.
Adjusting the interest rate is one of the BCRA’s main tools in handling the country’s economic performance. This monetary policy tool impacts the amount of currency in circulation.
When interest rates go up, people use their money to buy short term debt instruments (Lebac), attracted by the high returns. This translates into a lower amount or volume of money in the market. Reversing that process, as the BCRA lowers its interest rates — and consequently pump pesos into circulation at a higher volume — this increases consumption, giving the economy a boost.
At the same time, this means that people who want to save their money will resort to other means to beat inflation, such as buying dollars. This is why the value of the US currency has risen during the past days and seems likely to reach AR $16 soon. Bonds adjusted by inflation (CER) and future dollar contracts — yes, those for which former President Cristina Fernández de Kirchner along with other high ranking members of her administration are indicted — are other means.