Within the framework of the XVI Global Markets Seminar “Challenging Consensus”, Vice President Gustavo Cañonero spoke about the challenges and opportunities of the new monetary scheme in Argentina.
The event was held on March 5 in Santiago, Chile. Below, Cañonero’s main ideas in his dissertation:
After several months of strong instability, monetary policy faced in September the need to recover lost confidence and to reconstitute a nominal anchor for the economy. It was necessary to choose a simple but convincing monetary scheme, with a strict commitment to a target controllable by the Central Bank. Consequently, the zero growth target for the Monetary Base was chosen for nine consecutive months, excluding the seasonal adjustment of December and June. The principle is clear: without pesos there can be no nominal disorder like the one observed in 2018.
The monetary scheme was complemented by the definition of a free floating exchange rate zone that incorporated the possibility of intervening in the foreign exchange market whenever the exchange rate left that zone, reinforcing or relaxing the monetary restriction if the peso depreciated or appreciated, respectively, beyond the non-intervention zone.
In every month, the original monetary base target was overreached, allowing interest rates to seek the level demanded to balance the liquidity restriction imposed. As the weeks went by, interest rates fell, reflecting an improvement in the inflationary outlook, lower volatility of the exchange rate, and some recovery of a nominal anchor.
The fall in interest rates accelerated with the inflow of foreign funds, and the BCRA introduced regulatory changes on two occasions, in mid-November and February, to correct regulatory gaps that exacerbated very short-term investments.
A lower flow from abroad together with a higher-than-expected inflation number in January generated a reversal in the demand for pesos that finally pushed interest rates back to a level more in line with the observed inflation.
January’s relatively bad inflationary surprise was related to sharp corrections in some specific prices. In particular, the core inflation index that excludes the price of meat shows that inflation in January would have continued to fall compared to December if it were not for the impact of this single product.
Despite the anti-inflationary bias of monetary policy, inflation remains high. The current scheme automatically reinforces its contractionary bias in the face of increases in the price level, since the real value of the monetary base target is reduced.
Even so, the Central Bank considered it necessary to reinforce this bias. Monetary policy acts with lags, but the Central Bank cannot ignore the latest inflationary number and the reaction that this generated in the financial markets and in society, and announced an additional monetary restriction until May inclusive, preserving the levels of overcompliance with the base target.
The new monetary policy announcements are aimed at moderating the impact of short-term inflationary dynamics on inflation expectations.
The BCRA’s main mission is to reduce inflation, which is still very high. This monetary authority considers that a strict control of monetary aggregates will lead to this objective. Perseverance and monetary discipline are essential to lower inflation and therefore the Central Bank is prepared to maintain this contractionary bias for as long as necessary.
