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Argentina central bank chief pledges further rate cuts; Leliq purchases limited

Argentina's benchmark interest rate will continue on its downward path this month, Banco Central de la República Argentina Chief Miguel Pesce confirmed in a Jan 8. interview with Bloomberg News, while the monetary authority also announced a limit to the amount of short-term Leliq notes banks can buy per day.

"We will definitely continue with the descending rate path," Pesce said, pointing out that "high rates didn't have the effect of slowing inflation" as had been sought by the previous administration, but that "they were creating a sharp recessionary effect."

Instead, the central bank chief expects inflation to come down through price controls, freezing public tariffs and a "social pact" made up of agreements between unions, businesses and the government.

Pesce refrained from providing forecasts on inflation, economic growth, and foreign reserve and budget targets, but vowed that inflation would be lower in 2020 than it was in 2019, when it topped 50%.

Meanwhile, in an effort to lower the benchmark rate which is tied to the daily auctions of the Leliq notes, the monetary authority ruled in a Jan. 8 filing that financial entities will not be able to bid for a greater amount than the sum of the current account balance at the central bank, the net Pases balance with the central bank and the Leliq maturities of the day.

Faced with this measure, banks will now seek alternative shelter at lower rates for part of their liquidity. The funds are likely to be redirected toward the Pase instrument, whose rate stands at 48%, 700 basis points below that offered by Leliqs, El Cronista reported.

The monetary authority also hopes the move will eventually encourage banks to bring down the interest rate on loans to individuals and the private sector, although the measure is also likely to be met with a drop in rates offered by lenders on fixed-term deposits, which could push savers to seek dollars on the parallel market.

In Dec. 2019, the first month of President Alberto Fernández's term in office, the central bank lowered the rate on the seven-day Leliq notes, first to 58% from 63%, and then to 55%.