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Source: Bloomberg Businessweek
By: Eliana Raszewski

Argentina’s central bank plans the biggest increase in the money supply since at least 2006 in a bid to keep local interest rates down.

Argentina aims to boost the amount of money in the economy, as measured by the M2 gauge, by 28 percent in December from a year earlier, the central bank said last month. Argentina targeted a 25 percent increase in December 2010 from a year ago, compared with 14.9 percent in the 12 months through November in Brazil and a 3.3 percent increase through November in the U.S.

Expanding the money supply may hold down the 10.81 percent benchmark Badlar rate, helping sustain the fastest economic expansion since 2005 while threatening to push up the world’s second-highest inflation, said Maximiliano Castillo Carrillo, a former manager of macroeconomic analysis at the central bank.

“What this tells the market is that they’ll try to keep interest rates down, as low as possible, to stimulate growth,” said Carrillo, who was at the bank from 2003 to 2009 and is now the director of the ACM research company in Buenos Aires. “It reflects a belief that inflation doesn’t have monetary roots or that monetary policy has little role in fighting inflation.”

The badlar rate that banks pay on deposits of more than 1 million pesos ($250,000) held for 30 to 35 days reached a 13- month high of 11.5 percent on Dec. 14 and has ranged between 10.8 percent and 11.4 percent since. Chilean 30-day deposits pay 0.33 percent and Mexican 28-day deposits pay 4.85 percent. The badlar is a benchmark for Argentine corporate bond yields.

25 Percent Surge

Argentina consumer prices surged 25 percent last year, the most in the world after Venezuela, said Hernan Lacunza, a former general manager at the bank. The government said prices rose 11 percent in November from a year earlier. Economists and politicians including Vice President Julio Cobos have questioned the government’s inflation data since 2007.

The bank’s monetary program reflects the expansion in economic activity and the increase in transactions that demand more bills, said an official at the central bank, who asked not to be identified because he isn’t allowed to speak publicly.

“We don’t see any of the conventional sources of inflation in Argentina,” central bank President Mercedes Marco del Pont told reporters in Buenos Aires on Nov. 10. “There are some problems on the supply side. We don’t see monetary reasons for prices to rise and we don’t see excessive demand.”

Argentines tend to withdraw their savings from banks and boost purchases of property and cars when inflation accelerates, said Eduardo Costantini, who manages $1.2 billion at Consultatio Asset Management in Buenos Aires, in a Dec. 9 interview.

Argentine auto sales rose 43.3 percent last year from a year earlier, the country’s Automobile Manufacturers Association reported Jan. 5.

Faster Inflation

Faster inflation and a relatively stable peso may prompt the badlar to increase as banks seek to attract deposits, said Mariano Kruskevich, head of research of Grupo SBS, whose SBS Fondos unit manages 1 billion pesos. Kruskevich forecasts the badlar will climb to more than 12 percent in the first quarter.

A rising badlar will benefit holders of Argentine debt linked to the benchmark rate, such as the country’s 6-year Bonar bonds due in 2015, said Javier Salvucci, research analyst at Silver Cloud Advisors SA in Buenos Aires.

“Most of the government’s fiscal and monetary policies, along with the very expansive public spending, are inflationary,” said Salvucci. “I’d expect savers to start demanding higher interest rates to make deposits at the banks.”

Warrants linked to economic expansion rose 0.05 cent to 15.15 cents as of 9:11 a.m. New York time, according to data compiled by Bloomberg.

Argentine Swaps

The peso weakened was little changed today at 3.9783 per dollar. The currency declined 4.5 percent last year, making it the only one to weaken against the dollar among six regional currencies tracked by Bloomberg.

The cost of Argentine credit-default swaps rose 16 basis points, or 0.16 percentage point, to 577. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Central government spending jumped 48 percent in November from a year earlier to about 40 billion pesos. Revenue increased 45 percent to 43.3 billion pesos.

The M2 gauge includes cash in circulation and deposits in checking and savings accounts.

The bank’s money supply plan is “inconsistent” with its projection for a slowing economy, Lacunza, 41, said in a phone interview. The central bank originally estimated 2010 economic expansion of 2.5 percent before raising it to 9 percent, the most since 2005. Gross domestic product may increase 3.5 percent to 6.5 percent this year, the bank said in a Dec. 30 report.

“The monetary policy program reflects a total failure by the central bank to make an effort to rein in inflation,” said Lacunza, who runs the Empiria Consultores economic research company in Buenos Aires. “Inflation at some point will start hitting the economic growth.”

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