Fixed terms versus inflation: who wins the race

After data release inflation April, which reached 6%, the central bank (BCRA) decided to raise interest rates in the financial system by two points for the fifth time this year. Among them are those who pay fixed installments.

With nominal yields less than or equal to 48%, the effective annual rates of the fixed durations – which are those which are compared to inflation – are now reaching the zone of 60%. INDEC reported that prices have increased by 58% in the last 12 months. Therefore, the new yields of pesos would beat past inflationbut not to future escalation, since inflation expectations for this year are already above 65%.

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Although they do not ensure a positive return, increases in the minimum rates for fixed-term contracts boost locations banks in this traditional savings instrument.

How were the rates for traditional 30-day fixed-term contracts

The yields of mandates fixed at 30 days have increased by 2 percentage points and are as follows:

  • The bone deposits up to $10 million carried out by human persons in banks will pay, at a minimum, a nominal annual rate of 48% (or 4% per month), which means an effective annual return of 60.1%.
  • the rest of fixed terms -includes those made by companies and those made by individuals for amounts greater than $10 million- will have a minimum return of 46% nominal (3.83% per month), which translates to 57.1% cash.

Fixed terms against inflation

Although the IMF has asked the government to keep the real rate in positive territory, the persistent rise in prices makes it difficult to live up to the slogan. In Aprildespite improved yields, traditional fixed-term contracts lost 2.3% per month or 28% per yearas estimated GAM Capital.

Except on a few occasions, the return of fixed-term contracts lost to inflation under the Alberto Fernández administration. (Photo: GMA Capital).

For this month, the numbers don’t look much better. “The latest movement in the cost of money, given the expectation of mayonnaise (4.4%, according to the last official poll), leaves the real remuneration between -3.6% and -6.5% (annual nominal rate),” a report from that company calculated.

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On the other hand, if an inflation figure similar to that of April were to repeat itself this month, real yields would fall even further. GMA has calculated that the the negative rate would be 22.6% for retail depositors and it would reach -24.5% (both, in annual terms) for the rest of the fixed 30-day terms.

Despite rising rates, fixed maturities continue to lose to inflation

“In other words, the BCRA should place the nominal rates at 72% (increases of between 23 and 26 percentage points) to reach a neutral real rate,” said the company’s analysts, who also considered that the positive return is a necessary, but not sufficient, condition to curb inflation.

UVA Fixed Terms: How Much Inflation-Beating Deposits Pay

Fixed terms that adjust to UVA are the only ones that win the price race, since the principal is adjusted according to the variation in inflation and, in addition, they offer a small additional package.

Year-on-year inflation reached 58% in April, the highest value recorded in the past 30 years.  (Photo: Camila Godoy/Telam).
Year-on-year inflation reached 58% in April, the highest value recorded in the past 30 years. (Photo: Camila Godoy/Telam).

After the last BCRA-defined rate hike, there have been changes in the pre-cancellable version UVA fixed terms. It is these deposits which, although agreed for 90 days, can be withdrawn after the first month.

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These savers who prepay lose adjustment for inflation and benefit from a fixed rate. Until last Thursday, this yield was 41%, but now the BCRA increased to 43%.

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