Economy Minister Luis Caputo Signals New Era in Economic Policy with End of Negative Real Interest Rates

Economy Minister Luis Caputo recently declared the end of an era of negative real interest rates in the country. This shift marks a new era in economic policy as it was no longer necessary to promote negative rates to advance the liquefaction of liabilities of the Central Bank (BCRA).

The dominant idea in economic policy had previously been focused on meeting President’s objective to end BCRA liabilities. This involved transferring BCRA liabilities to Treasury debt, which was seen as a risky move. The payment of interest on these debts played a significant role in monetary emission.

To address these challenges, a core strategy has been the policy of extending the payment of short-term debt by placing national government securities in banks’ portfolios. Lecaps, short-term bonds that pay banks 4.25% monthly, were introduced as an alternative to negative rates. Caputo emphasized that this rate was no longer negative in the face of inflation.

While Lecaps offered a 4.25% return, traditional fixed terms of savers were considerably lower. This led to challenges for those who saved in pesos and signified a shift in monetary policy towards stability and growth.

Caputo’s announcement also reflected a recognition that lowering monetary policy reference rate had unintended consequences such as an increase in exchange gap and an impact on inflation and agricultural exports. The government now aims to maintain stable interest rates while considering factors such as inflation and agricultural exports.

In addition, Caputo stated that the decision not to devalue the currency and maintain the blend dollar system could provide stability in the exchange market. The government is also considering negotiating an agreement with the Monetary Fund to address economic challenges and maintain stability and growth.

Overall, Caputo’s announcements signal a shift towards stability and growth in economic policy, with implications depending on how they are implemented and their impact on different sectors of the economy.