January 27, 2020. The Argentine economy is facing a critical macroeconomic reality characterized by the coexistence of very high inflation records, and a deep and lingering recessive process, which turned into noticeable levels of unemployment, precarity and poverty. In turn, the shortage of foreign currency has generated a marked weakness in the foreign sector, which severely conditions the economy's aggregate performance.
These limitations on foreign currency flows for trade purposes added to the loss of access to voluntary lending and new domestic capital flight amid a foreign indebtedness process which was, without a doubt, unsustainable.
The inflation rate followed the same path. This rate accelerated notably in the last two years due to diagnosis and policy mistakes, which tended to underestimate the difficulties to lead to a sustainable drop of an inflationary process based on structural factors and inertial components. That wrong idea brought about the intention of facing the problem by appealing exclusively to tools of a monetary nature. Meanwhile, the hypothesis of a sine die continuity of a reality characterized by plenty foreign financing led to the mistake of inducing a full deregulation of the foreign exchange market and an unrestrictive financial opening.
Towards the end of its administration, the former National Government decided upon a series of restrictive measures to access the foreign exchange market—essential to mitigate the crisis and the worsening of the balance of payments—, compulsively rescheduled domestic debt maturities, while fiscal deficit, with no possibilities of being financed with foreign debt, started to be financed with money issuance.
In this scenario, the new National Government adopted some social, productive, regulatory and fiscal consolidation measures with the aim of facing the most visible signs of the crisis and stabilizing the macroeconomy and, from then onwards, redefining policy priorities to lay the foundations for a sustainable economic development process and provide the conditions for fiscal and public debt sustainability.
In this context of economic and social emergency, and of a critical situation regarding access to voluntary foreign debt, the BCRA considers it necessary to exceptionally assist the Treasury, both in the cases of foreign debt payments—if strictly necessary and within prudent limits in line with monetary market equilibrium—and financing in domestic currency.
As a result, until progress can be made on those issues, it is not possible to devise a monetary policy strategy with specific objectives about the expansion of monetary aggregates or inflation.
Bearing these limitations in mind, and in line with its mandate to “promote—within the framework of its powers and the policies set by the National Government—monetary and financial stability, employment, and economic development with social equality”, the BCRA finds it necessary to set a series of useful guidelines to contribute towards the formation of expectations of the different economic players in our country.
Such guidelines refer to the following concepts:
Interest rate. Given the existence of inertial components in the current inflationary process and the scarce depth of the domestic credit market, the attempt to reduce inflation by resorting solely to excessively high real interest rates has proven to be ineffective and somehow counter-productive. The real interest rate level must preserve the financial and foreign stability of the economy and must be compatible with production financing and the build-up of a longer-term yield curve, favoring domestic currency saving. This entails avoiding negative real interest rates.
Prices. The aim is a gradual but sustainable reduction of the inflation rate from a prudent and consistent monetary policy approach, coordinated with the rest of the economic policy and with the income policy promoted by the National Government. In this framework, prices are expected to slow down to clearly lower levels than in 2019 due to the concurrence of the monetary, foreign exchange and fiscal policies, price agreements and the coordination of short and long-term strategies through different organizations.
Monetary aggregates. Monetary aggregates are at historically low levels in terms of GDP. In a context of trust recovery and gradual reduction of interest rates that would improve credit conditions and encourage economic activity, a gradual process of remonetization is expected. Monetary policy must promote the prudent expansion of monetary aggregates, avoiding imbalances that would directly or indirectly affect the inflationary process.
Exchange rate. A managed floating exchange rate policy is a suitable tool to avoid striking fluctuations of the exchange rate parity that give rise to negative effects on competitiveness, domestic prices and income distribution. The exchange rate policy will also promote the precautionary acquisition of international reserves on the basis of a genuine inflow of foreign currency from the foreign sector.
Credit. Domestic credit intermediation is also at very low relative levels and should expand to meet the needs of households and production with a strategic focus not only on the short-term but also on the medium and long-terms.
Economic activity and employment. The policies adopted so far will allow defining a new macroeconomic standpoint based on the domestic market recovery and the growth of exports, leading to investment and productivity increases, which will combine the expansion of demand and employment with the productive change needed to achieve long-term continuity.