The City and the government's attention is no longer focused on the dollar's price: rates are taking center stage.

After rising more than 13% in July, the exchange rate stabilized this month at the expense of increasingly uncertain interest rate volatility and the domestic economy. The monetary tightening implemented by the government as a strategy leading up to the elections caused the dollar to fall less than 4% this month, at the cost of greater instability in the cost of money, with effects already evident in credit and economic activity.

In the new scenario, the peso front appears to be more important than the exchange rate , although the latter's stability is far from guaranteed. The government's goal of "drying up the market of pesos" at the cost of paying rates well above inflation may moderate demand for dollars, although the level of peso instruments recorded in the last two weeks makes it clear that exchange rate tensions and financial uncertainty remain high.

At the boutique brokerage firm Criteria, they analyzed the evolution of interest rates and the exchange rate over the last twelve months and found that, during times of greatest economic uncertainty, yields in pesos increased. This year, interest rates have overheated three times, although the current episode is the longest-running with the most exaggerated movements. The first time was immediately after the Libra scandal; the second time was in April, when the market was eager to learn the terms and conditions of the agreement with the Fund; and the third time has occurred since the second half of July, when the dismantling of the LEFIs began.

LEFI (Liquidity Fiscal Letters) were instruments issued by the National Treasury and used as a monetary tool to absorb excess pesos in the banking system, replacing the passive repos used by the Central Bank of Argentina (BCRA). When banks had excess pesos at the close of the day, they were automatically placed in LEFIs, and the following day the Central Bank of Argentina (BCRA) returned them with interest, functioning as an automatic daily remuneration of those balances.

The Central Bank sought to break away from this market, which established it as the key determinant of the economy's interest rate, with the goal of achieving an "endogenous" rate, meaning one determined by the free play of supply and demand for those pesos.

"Now, banks, along with the government and other market participants, are looking for ways to achieve a new equilibrium and manage this liquidity. There are some surprising announcements," commented Gustavo Araujo, head of research at Criteria. "The government reaffirms its position of not being willing to compromise on the exchange rate and inflation. And if the economy has to suffer, it's willing to take that risk," he added.

Last week, data emerged that anticipate the possible effects of this highly restrictive monetary policy. On the one hand, the EMAE (Economic and Monetary Statistics) already showed a 0.7% contraction in activity in June, even before the exchange rate jump and the liquidity storm of July. On the other hand, Banco Provincia presented a new indicator, based on a complex Artificial Intelligence algorithm, which measures activity in the province of Buenos Aires week by week. Pulso BA (Basic Pulse), as it was called, is turning on the first yellow light where the next electoral battle is being played out: in the last month, the economy fell another 0.4%.

Two weeks before the electoral test in that territory, the data takes on greater significance. "While the pass-through to prices is slow for now and allows for a healthy improvement in Argentina's real exchange rate, making it more competitive, the rise in interest rates will impact an economy that was already showing clear signs of fatigue. Although the electoral outlook for the ruling party remains encouraging, the weakness of activity and the threat of a rebound in inflation are risks worth monitoring," Cohen analysts anticipated.

With another massive peso debt maturity scheduled for this week, the City agrees that high rates will set the pace in the days leading up to the Buenos Aires elections. "The government demonstrates an explicit commitment to maintaining high rates as an anchor to preserve exchange rate stability at current levels—however, at the close of this week, the official dollar rose again for the third consecutive day," warned Invecq. "Maintaining real yields of this magnitude over time poses challenges to macroeconomic consistency and could lead to expectations of greater credit risk ," they added.