After having celebrated the rise in reserves -net purchases of more than US$5.8 billion- which allowed it to meet the goals committed to the International Monetary Fundthe minister Sergio Massa The inflation data for December is preparing to celebrate next week, which will probably start with a 5.
To finish, the blue dollar stopped its climb and he denied the catastrophic forecasts that spoke of an imminent jump from the parallel to the $400 step. Now, at its $350 level, the blue reduced the gap with the officer to 95%a figure below the 102% of December and far from the peak of 160% that had been reached in July.
Price surveys by private economists indicate that the moderation already hinted at in November inflation continues, despite some seasonal rises. The food basket that measures the LCG consultant registered a variation of “only” 3.5% in the last month of the year, which implies a drop of 0.4 points compared to the previous month.
For his part, eco go -the consultancy run by Marina Dal Poggetto- which follows “core inflation” -which excludes regulated prices and those of seasonal variation- measured 4.5%an acceptably good record, which will be offset by increases of 6.2% in regulated prices and 8.2% in seasonal prices.
In any case, the number that is released will allow Massa to revalidate his commitment that the CPI will gradually fall, at a rate of one point per two-month period, until it stands below 4% per month in April.
And it is a situation that puts the minister and the Central Bank before the dilemma on how to react with the rest of the variables relevant. Basically, if the exchange rate and the interest rate will start to move in line with a low inflation scenario or if they will continue high, for the sake of financial caution.
Sergio Massa, faced with the dilemma of stopping the dollar and cutting the rate, or waiting for the drop in inflation to continue.
Massa has defended the convenience of aligning the variables, which suggests that, sooner or later, the dollar and the rate will move downward. For now, December’s devaluation ended with 5.9%, breaking a four-month upward “crawling peg” trend.
The dollar, torn between two opposing forces
However, the government’s signals are still not being clearly decoded in the market. Because although December ended with a lower rate of devaluation, in the last week of the year and the start of January a slight acceleration was observed.
In addition, there are no signs of an urgent interest rate cut either, despite the fact that the 75% level – which, capitalizing interest, gives 107% per year – could be considered excessive compared to the official inflation projection.
This could be indicating that the Government prefers to remain cautious rather than risk financial shocks just in the most volatile season of the year – when the explosive mix of falling demand for money, greater demand for dollars and a decrease in the income of export currencies typically takes place.
The truth is that exchange rate policy has been exposed to contradictory forces in recent weeks: on the one hand, the upward pressure from those who argue that given the rise in the blue a high crawling peg should be maintained; on the other hand, the criticisms of those who they miss an exchange “anchor” and they claim that a high devaluation rate can itself become an inflationary factor.
The Central Bank resisted upward pressures, arguing that its reserve situation was strengthening thanks to the flood of foreign currency that entered in the last days of the year thanks to the “soybean dollar” program.
The main fear of the market: that the strengthening of the BCRA will be reversed quickly once the effect of the “soybean dollar” has faded.
What the BCRA was actually saying tacitly was that, this time, the Dolar blue had not risen as a result of a deterioration in reserves but for temporary reasons, typical of the informal market. And that, consequently, it was logical that the devaluation rate will not accelerate to get in tune with the parallel but, on the contrary, moderate to align with inflation.
That is why economists’ expectations suggest that, at the start of the year, the tendency for the dollar to be in line with inflation will intensify, which means that it will gradually approach a level of 5% per month.
The magnifying glass in the BCRA box of dollars
If this exchange brake were to occur, it would be a situation that would please those within the government coalition itself, where warnings abounded about the negative consequences of stepping on the “crawling peg” accelerator, both for economic and political reasons.
However, alarm bells go off among economists, who are more afraid of excessive exchange rate moderation. There are many who believe that the BCRA cash could deteriorate quickly and that there are reasons to think that the blue could continue to rise.
The biggest concerns are focused on the demanding financial schedule for the summer: in January it will be necessary to pay US$2,751 million to the IMF, while in February the account will be US$561 million and US$3,033 million in March. In contrast to this outflow of foreign currency, this summer is expected to be one of the weakest in the contribution of dollars from the fields, given the effect of the drought that halved the forecast for the wheat campaign.
In short, the fear of economists is that the competitiveness of the economy could worsen, just at the moment when it is most necessary to prop up exports.
“Without correction by means of, in 2023 the government will have to manage an accumulated exchange delay that threatens the need to accumulate reserves and keep devaluation expectations anesthetized”warns a report from the Ecolatina consultant.
Excess pesos, with a rate cut, is the typical seasonal problem known as “the February trap.”
While Jorge Vasconceloschief economist of the Mediterranean Foundation, warns that a slowdown in the rate of devaluation will imply that the Government must continue resorting to more sectoral schemes such as the “soybean dollar”, which has a fiscal impact.
“The issuance bonus, in this case, would be of the order of 85 pesos for each dollar settled through that window, multiplied by billions,” argues the economist.
The meat factor and latent inflation
But, above all, what is causing concern in the market is the question of whether the inflationary moderation of the last two months should be considered a new trend or just a passing phenomenon. It is a crucial question, because depending on the answer given, the decision will be made whether to cut the interest rate or keep it at its current level.
The experiences of recent years show that at this time there is often a risky situation for the Central Bank, which sometimes confuses the increase in the demand for money at the end of the year as a change in trend and then cuts the rate only to run into “the february trap”: a sudden surplus of pesos struggles to take refuge in the dollar and causes destabilization.
For now, there are already strong warnings about a worsening of inflation in the short term, caused by the “meat factor.” It happens that what kept the CPI food item with a low variation -which increased by 3.5% against a general average of 4.9%- was precisely the meat item, which barely registered a rise of 0.9%.
And what kept meat cheap was a combination of two extraordinary factors: the drought, which leads to a shortage of food for animals; Y the retraction of imports, which leads to an oversupply of cattle. As a result, producers are sending far more cows than usual to slaughter, which keeps the price low.
The “meat effect”, the main concern when analyzing threats to the downward path of inflation.
But, as has been the case historically, such situations is usually short-lived and once the surplus supply has been consumed, a a price adjustment. It is a situation that analysts of the agricultural business believe will not take long to occur.
Austerity at the risk of excessive enthusiasm
And, finally, the classic inflationary worry factor remains in force: monetary expansion. Although it is true that Massa has shown fiscal austerity -in November, with a real year-on-year drop of 12%, five consecutive months of adjustment were completed- there are other emission engines monetary.
Every month, $440,000 million are poured into the market for interest payments from the Leliqs that the Central Bank uses to withdraw excess liquidity, which led to $3.36 million being issued for this reason in 2022, equivalent to 4.2% of GDP.
This situation put the Central Bank before a classic dilemma: lower the rate -with which it would help boost credit and, incidentally, reduce monetary expansion- but assuming the risk of further currency pressureor maintain the current situation, at least as long as inflation does not show strong signs of continuing its downward path.
Everything indicates that the government’s economic team decided take your time before cutting the rate and that, for now, the alignment of variables will be limited to the fact that the slide of the dollar approaches the variation of the CPI.
In fact, it transpired that the only situation that would lead to a drop in the rate would be that the inflationary index for December gave a figure lower than 4.9% registered in November, something that no one in the market believes can happen.
The truth is that the Government is attempting a difficult balance: aligning the fundamental variables of the economy so that they are in tune with a scenario of lower inflation, but without neglecting the lessons of other summers with crises. It is what leads to caution being the predominant attitude.
