Dollar rise, intervention and fatal conceit

Miguel Braun · Jul 31 2025 · 7 min read

Updated: Aug 1 2025

LEFIs (Fiscal Liquidity Letters) were instruments remunerated by the National Treasury to absorb pesos from banks short-term, contributing to liquidity, inflation and exchange rate control. They replaced what were previously LELIQs, inheriting the problem of BCRA's remunerated liabilities. Previously, the Central Bank financed these instruments with monetary emission, but the current government transferred that responsibility to the Treasury, easing pressure on the BCRA and reducing emission.

On July 10, 2025, the Treasury stopped issuing LEFIs, and banks swapped the existing stock (approximately ARS 15.5 trillion) for LECAPs and BONCAPs (peso bonds), with maturities between July and October 2025. This decision was part of the transition to a monetary aggregates control scheme, agreed with the IMF, where interest rates would be determined endogenously by the market, eliminating the monetary policy rate as an anchor. That is: previously the BCRA set the LEFI rates, now rates would be set in the secondary market for LECAPs and BONCAPs (peso bonds) and each new issuance would come out around the rates offered in the secondary market.

The elimination of LEFIs released approximately ARS 10 trillion to the market, since only a portion of the funds was absorbed by Lecaps (ARS 4.5–5.5 trillion) and another part went to bank reserve requirements (ARS 2–3 trillion). This excess liquidity produced the following effects:

• Initial Collapse of Interest Rates:

Without LEFIs as a reference instrument, banks went looking for short-term instruments to place their liquidity. This caused short-term rates, such as repo rates (one-day loans), to fall considerably. For example, the repo rate fell to lows of 12–16% annual nominal, against the 29% that LEFIs previously offered. Yields on fixed-term deposits and Lecaps also contracted, reducing the appeal of staying in pesos.

This was excellent news — in Argentina, lowering interest rates is urgent. The higher rates are, the more interest the State, companies and individuals pay to finance themselves. That's why we don't have accessible credit for anything and there is no economic growth.

· BCRA Reaction and Rate Hike:

To counter the excess liquidity and stabilize the market, the BCRA reactivated Passive Repos, a disused instrument, offering rates of up to 36% annual nominal, so banks could place that extra liquidity in passive repos. Additionally, the Treasury held emergency auctions, absorbing ARS 4.7–8.5 trillion in Lecaps and Boncaps with monthly effective rates (TEM) between 2.3% and 3.3%, which were above secondary market rates.

· Pressure on the Dollar:

The injection of pesos, combined with the initial rate drop (less premium for staying in pesos), incentivized portfolio dollarization, especially in a pre-election context and with lower FX liquidation from the agricultural sector after the temporary reduction in export withholdings ended. The BCRA then intervened by selling futures to moderate exchange rate pressure and push the dollar down.

In turn, the Treasury continued with off-calendar auctions to absorb excess pesos, validating rates well above the secondary market to again raise the premium for staying in pesos and prevent the dollar from spiking. This obviously caused peso bonds to fall, as logic tells us they should fall until their yield equals the rates offered in the Treasury auctions.

So there is active intervention in ROFEX (dollar futures market) and in rates, which were supposedly going to be set endogenously now. Absorbing all excess pesos at rates above the secondary market is also a way of intervening, because they don't release liquidity to lower rates. And this is exactly what the Treasury did with off-calendar auctions in July and the BCRA with passive repos and raising reserve requirements. What happened to the "Anker Point", where banks would prefer to lend to private parties rather than the State and that would re-monetize the economy?

They are not complying with the free float of the dollar nor with free rate setting, besides absorbing all available credit (crowding out). All this with the sole objective of preventing the dollar from rising, and thus avoiding that rise from generating price increases (called pass-through – where a dollar rise impacts peso prices).

But intervention is wrong for two reasons:

1) Lowering the rate is just as important as lowering inflation, because you lower the interest burden paid by the Treasury and therefore generate savings for the government. Besides, in Argentina there is almost no credit and this is due to the extremely high rates. It is critically important to lower them. The BCRA believes it knows exactly how much pesos the market demands, but isn't considering that the market would also demand a lot of credit that isn't available today because rates are too high and because they absorb all liquidity. That way, they don't let the economy monetize.

2) They would not be complying with the free float between bands that they had established for the dollar. Once the market sees they start intervening, it suspects something is wrong and starts demanding much more dollars than before. If they're intervening it means they're artificially holding its price, so the market goes out to buy. This generates more intervention and in the end they fulfill neither the free-dollar premise nor endogenous rates.

They do all this to finish killing inflation, but they're not seeing that lowering rates is equally important and ultimately is a bit what kills inflation afterwards. By remunerating pesos at a lower endogenously determined rate, the market itself was telling you that it no longer needed as much premium to stay in pesos because it perceived inflation was going to keep falling.

Raising rates artificially is what Kirchnerism and Massa did when they didn't want the dollar to rise, and it's what caused the BCRA's remunerated liabilities to explode. It is not sustainable to pay such high rates, not for the Treasury, nor for the BCRA, nor for individuals who want credit.

Worse still, when the market sees you're artificially holding the price, it squeezes you until it gets as many dollars as possible, because it understands the price is cheaper than it should be precisely because of the intervention you're doing.

In summary, it's easy to criticize from the outside, and I don't envy the task of public officials — a demanding role exposed to constant questioning. I appreciate the effort of Milei's government, which I consider is doing commendable work. However, it disconcerts me that they breach certain promises, like these decisions that contradict what was announced.

The fatal conceit:

Friedrich Hayek's concept of "fatal conceit", popularized by Milei, refers to the presumption of central planners (governments, central banks, economists) of possessing the knowledge necessary to control complex economic variables, such as the exchange rate or interest rates. Milei uses this concept to criticize market interventions, including policies to control the dollar and set rates.

From Milei's perspective, these interventions are an example of fatal conceit: the BCRA assumes it can determine the "correct" exchange rate by manipulating the market, rather than letting supply and demand establish it. Milei argues that setting the exchange rate requires impossible knowledge about the present and future preferences and needs of all economic agents, distorting relative prices and generating inefficiencies.

The same with interest rates and the economy's liquidity level, which should emerge from the natural interaction of money supply and demand. Setting artificially high rates to absorb liquidity or deter dollarization distorts market signals, affecting investment and consumption decisions.

Conclusion:

The government seems to prioritize its battle against inflation over letting the dollar float freely and rates be market-determined. Between the BCRA and the Treasury, they absorb all available liquidity with new instruments, leaving no room for current instrument rates to fall. This implies the State takes all available credit in the economy, and comes from the BCRA's mistake of believing they can perfectly match peso demand with supply (they don't want "excess pesos"), when demand in Argentina would clearly grow if individuals and companies had credit available.

I don't see what the problem would be if the dollar rose a bit. Argentina has become expensive in dollar terms and a dollar rise would benefit the export sector, which has been so punished with a fictitious exchange rate for so long and with withholdings of all kinds. Meanwhile, if they hadn't absorbed all liquidity, the rate could have come down and credit would have started to reactivate. This would also have implied a price rise for holders of peso bonds, which was also positive because it would reward those who had invested beforehand in these securities.

I learned the concept of fatal conceit precisely listening to Milei, and that's why I don't understand that his own government isn't applying it now. Central banks in crisis or recession periods precisely inject liquidity to lower rates and boost consumption. There's so much fear that the dollar rises and inflation returns, that they forget that lowering rates and reactivating the economy are equally important.

Lowering rates also generates money demand, because companies and people will demand much more credit, which will in turn allow us to grow. There's no way the BCRA can correctly establish the peso demand of the economy, because for that they would need to know the present and future preferences and needs of all economic agents, which is impossible.