March 6, 2019. Within the framework of the XVI Global Markets Seminar called “Challenging the Consensus” (Desafiando el Consenso), the BCRA’s Deputy Governor, Gustavo Cañonero, discussed the challenges and opportunities of the new monetary scheme in Argentina.
This event took place on March 5 in Santiago, Chile. The major ideas of Cañonero’s lecture are outlined below:
After several months of high instability, monetary policy was faced in September with the need to restore confidence and to provide a nominal anchor for Argentina's economy. This called for a simple, though convincing, monetary scheme, with a firm commitment on a target under the BCRA's control. Therefore, the BCRA set the objective of zero growth of the monetary base for nine consecutive months, excluding December and June’s seasonal adjustments. The principle behind this is clear: without pesos, there is no room for nominal disorder as that observed in 2018.
The monetary scheme was supplemented with a range of free-floating exchange rates, whereby the BCRA can intervene in the foreign exchange market if the foreign exchange rate lies either below the floor or over the ceiling, thus reinforcing or relaxing the monetary restriction if the peso depreciates or appreciates, respectively, beyond the non-intervention range.
The original monetary base target has been over complied so far, letting interest rates find the level required to balance restriction on liquidity. Interest rates fell in the course of weeks, showing an improved inflationary perspective, less volatility of the foreign exchange rate and some recovery of a nominal anchor.
The drop of the interest rates accelerated with the inflow of foreign capital. The BCRA implemented changes to regulations twice—by mid-November and mid-February—in order to bridge regulatory gaps that ended up boosting very short-term investments.
A lower foreign capital inflow together with January’s inflation—higher than expected—brought about a reversal in the demand for pesos that eventually pushed interest rates up in terms of inflation.
January’s news about inflation was related to major adjustments to the price of certain goods. In particular, core inflation rate, which excludes the price of meat, shows that inflation in January would have kept on following a falling trend against December if not for the price of meat.
Despite the anti-inflationary bias of the monetary policy, inflation remains high. The current scheme immediately reinforces its contractionary bias in light of price increases given that the real value of the monetary base target goes down.
Nevertheless, the BCRA deemed it necessary to keep on reinforcing this bias. The monetary policy has shown some lag so far, but the BCRA cannot ignore the last inflationary figures and the reaction this caused in financial markets and in society at large. Therefore, the BCRA announced an additional monetary restriction through May, persisting in reaching the levels of over-compliance with the monetary base target.
The new announcements of monetary policy are targeted towards cushioning the impact of short-term inflationary dynamics over inflation expectations.
The BCRA’s core mission is to reduce inflation, which is still very high. This monetary authority believes that a strict control of monetary aggregates will help achieve such goal. Determination and monetary discipline are of the essence to reduce inflation, and the BCRA is prepared to keep this contractionary bias for as long as it is necessary.