The full speech is as follows:
Good afternoon.
It is an honor for me to have been appointed as Governor of the BCRA. I would like to thank President Macri for trusting me.
These are not easy times. The last few months were hard for all of us. International financial volatility triggered inflation acceleration, a drop in economic activity and currency depreciation in our country.
The last few months unveiled the extent to which the challenges we face have become relevant. Expectations of hasty hikes in international interest rates affected emerging countries in general and Argentina in particular. This financial turmoil has shown two important types of vulnerabilities that our economy has born for long: fiscal deficit and inflation.
These months have also shown that we, as government, have made some mistakes such as underestimating the tasks of going over imbalances inherited from the former administration, and the speed at which international circumstances would change.
It is a must for us to move quickly towards solving these two structural problems that affect Argentina’s economy. The Ministry of Economy has already announced the removal of primary fiscal deficit from next year.
Today I will present the measures for addressing our second vulnerability: inflation. The BCRA’s main objective is to reduce inflation. I will now describe the actions we will immediately perform in this regard.
The inflation targeting regime as implemented in the last three years did not work as expected. In fact, the necessary conditions were not in place for this to happen. Consequently, we will leave that regime aside. This regime is, nonetheless, widely used and has allowed the vast majority of countries to control inflation. I think this will eventually happen in Argentina. Under other conditions, I am sure that inflation targeting will also work in our country.
But at present, and given the recent high volatility in prices, we must provide clearer and stronger guidelines regarding the BCRA’s course of actions to reduce inflation. The monetary program we are presenting provides what economists call a nominal anchor in the short term. Monetary policy instruments must adapt to reality. At present, Argentina needs a simple though forceful anchor.
Our nominal anchor will rest on tight control over our economy’s amount of pesos. There is plentiful evidence regarding a tight relationship between money and prices. For that reason, many stabilization plans have traditionally pivoted around the control of the amount of money.
We will implement any necessary measures to ensure ZERO growth in the monetary base—i.e. the amount of money in circulation plus banks’ deposits in pesos held at the BCRA—in nominal terms from now to June 2019. This is our commitment. We have chosen the monetary base—out of a diversity of monetary aggregates—because it is most clearly under the BCRA’s control. The monetary base figure is published daily, so anyone can check we are meeting our commitment of keeping the monthly average unchanged.
This measure entails an important monetary contraction, which is necessary to recover nominal stability and reduce inflation expectations. The monetary base has been increasing by 2.2% monthly, but from now onwards it is expected to stop growing. Indeed, we are called to move in this direction in the short term in order to restore nominal stability.
The BCRA could adopt such a draconian measure to reduce inflation precisely because it had stopped making transfers to the Treasury in order to finance fiscal deficit since June. This is a key aspect. An improvement in fiscal accounts has enabled the Ministry of Economy and the BCRA to jointly take on the commitment of no monetary financing to the Treasury.
The anti-inflationary nature of zero growth in the monetary base is unquestionable, but it brings about no immediate effect on inflation. It may take a few months before we notice the inflation downturn and the fact that the current context of uncertainty comes to an end.
The implementation of monetary policy faced a huge stock of LEBAC bills. We will continue redeeming LEBAC bills—a process on which we have made considerable progress—and also applying our governing principle: the BCRA must make transactions with banks but not directly with the public. Thus, the implementation of monetary base targeting will be conducted through transactions of BCRA’s Liquidity Bills (LELIQs) with banks only.
Obviously, by executing this new monetary policy, the interest rate of LELIQs will float daily. This will take place because the interest rate will have to be adjusted for the BCRA to fulfill its target of zero growth of the monetary base. Floating will mainly occur in transactions between the BCRA and banks, and should not involve significant volatility in interest rates for the public.
We are also convinced about the advantages that exchange rate flexibility will bring about. Exchange rate floating allows countries to adapt to different external situations. This reduces the cost of economic activity and employment. Many countries, including ours, have suffered the consequences of being unable to adjust their exchange rate parity.
While certainly a flexible exchange rate has advantages, we cannot ignore that excessive volatility is nonetheless problematic. In this sense, Argentina is primarily vulnerable because the exchange rate plays a key role in the formation of inflation expectations.
For this reason, we supplement our commitment of zero growth in the monetary base with an intervention policy in the foreign exchange market in the face of excessive volatility. In order for these interventions to be predictable and transparent, the BCRA will apply a scheme whereby it will intervene in the foreign exchange market depending on intervention and non-intervention ranges.
The BCRA would not intervene in the foreign exchange market when the exchange rate is between ARS34 and ARS44. This range will be adjusted daily at a 3% monthly interest rate until the end of the year. Within this non-intervention range, the BCRA will not operate in the exchange rate market but will make efforts to keep a zero growth in the monetary base by means of LELIQs auctions.
If the peso depreciates and the exchange rate climbs above the non-intervention range, the monetary authority will sell foreign currency for up to USD150 million daily to ensure market liquidity and prevent unjustified fluctuations. Thus, the BCRA will withdraw the pesos obtained from the sale of dollars and will not inject them otherwise in the market. The monetary base will be contracted as far as it is required.
We are also conscious about the risks that an excessive exchange rate appreciation entails for the real economy. A quick nominal appreciation means greater confidence and an increase in the demand for pesos. For that reason, if the exchange rate is below the non-intervention range, the BCRA will have the possibility of purchasing international reserves and, according to the conditions of the economy, decide how many dollars so bought will be sterilized. That is, the monetary base would only increase on clear signals of confidence in the peso and, as a result, reserves would also rise.
These ranges provide a crystal-clear and transparent framework of exchange rate intervention to reduce excessive exchange rate volatility. This will enable us to combine the advantages of a flexible exchange rate with the chance of preventing extreme and disruptive fluctuations.
The limits below and above the non-intervention range are not considered to be fixed parities to which the BCRA has committed. Firstly, limits will vary over time. Secondly, they should be understood as guidelines on the decisions the BCRA is expected to make in each range.
To sum up, the new monetary regime will be based on two key components: On the one hand, the strict control of the monetary base growth until June, which shows a firm commitment with inflation reduction. On the other hand, the limits on intervention and non-intervention ranges in the exchange rate market, which will allow us to reinforce the anchoring of the economy’s nominal variables. We hold that the new monetary scheme will allow inflation to get down, and price stability and predictability to recover, which has been so much longed for by Argentina.
Thank you.
