Argentina: The hard task to stabilize the Peso and control inflation

Argentina - Feb 27 2019
  • #credit risk
  • #gdp

Argentina: The hard task to stabilize the Peso and control inflation

The Central Bank of Argentina (CBA) has abandoned its inflation target since October 2018. Instead, they have applied a different monetary regime to tackle inflation and currency volatility. The monetary regime, based on monetary aggregates objectives and followed by the CBA interventions in the currency markets, seems to have been useful for stabilizing the extreme volatility of the domestic currency.

CBA interventions in the currency market are defined by thresholds (see chart) and anticipated by the CBA to stabilize expectations. At the beginning of the policy implementation, the zone of non-intervention in the exchange market was between 34 and 44 pesos per dollar, and was then modified by 3% each month following. Beyond this interval, the CBA could intervene by selling dollars if the exchange rate exceeds the upper limit, or by buying dollars if the peso is below the lower limit. The aim is to diminish volatility, to build trust for investors, and to maintain competitivity.

This measure has worked well for the exchange rate. However, since the monetary policy has not instantaneous effects on price stabilization, we can notice that the headline inflation is still high. On January 2019, the headline inflation was 49% on year-on-year basis, the highest inflation since 1991. The CBA expects inflation will diminish this year, but it will continue to be high (around 29% over a year).

Gabriela Aguilera Lizarazu, Economist
Sources: Beyond Ratings, Datastream, Central Bank of Argentina

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