The main objective of Sergio Massa with the measures announced early on Sunday, it is avoid a new run against the weightwhich shakes the shaky foundations of an already troubled economy.
The 8.4% inflation in April surprised the officials of the economic team themselves; a copy of what had happened a month before, when the 7.7% in March triggered an exchange rate run that heated up the inflationary dynamics, widened the exchange rate gap and put the “soybean dollar 3” on the brink of failure, which still practically does not started and it will hardly do so if the prices of the dollars continue to rise.
Massa believes that the new rise in interest rates -the third in less than a month- will serve to avoid a worsening of dollarizationvia an outflow of bank deposits.
The new yield – of 97% annual nominal, 152% effective annual – will tempt savers to keep the pesos in the banks despite the inflationary acceleration.
At the same time, it is clear that this 152% per year now becomes the new inflation expectation. It does not mean that the CPI will reach that level this year, but it does begin to be taken as a reference going forward.
Along with the sharp rise in interest rates -it rose from 78% per year to 97% per year in just three weeks-, the Central Bank promises greater intervention in the foreign exchange market. They ensure massive sales of dollarized bonds on a daily basis, something that has already been seen in recent weeks, and that served to keep cash with liquidity and the MEP calm.
The new rate hike seeks to avoid a worsening of dollarization.
The third leg of this package ties in with the “crawling peg” of the official dollar, the daily mini-devaluations made by the Central Bank.
There will also be a readjustment to the new rate of inflation. Massa does not want the price of the official dollar to be delayed (more).
Obviously, the other side of this decision returns to the question of prices: It escapes no one that a faster rise in the dollar also feeds back inflation. The Argentine economy entered this vicious circle a long time ago.
An adjustment to avoid the worst case scenario
Until now, Massa -and also Miguel Pesce- avoided a violent adjustment in the cost of money, knowing the damage to economic activity but, above all, in the additional monetary issue due to the performance of the Leliq.
Everything changed after the run against the peso last month, when the blue and the “blank” financial dollars approached $500.
Without enough dollars in the reserves, the government has few tools to defend the onslaught.
The reserves are still in a critical state and the BCRA does not have much firepower to intervene in the market.
On the one hand, he is forced to these undesirable measures (raise in the rate, interventions with devalued bonds and acceleration of the crawling peg) and also to carry out a additional block on imports.
This latest decision does no more than overheat inflation. It is clear that, under the current circumstances, Massa has already made the decision to drop the inflation target and focus on the exchange rate issue.
An abrupt devaluation in this context would have an unpredictable outcome. How high would the exchange rate and inflation rise if controls were loosened?
That scenario is the one that Massa wants to avoid at all costs. For some time now, for him, avoiding a disruptive devaluation has been a “question of State”.
Will the blessing of the IMF arrive?
Among the measures announced on Sunday mid-morning is a “acceleration of the agreement with the IMF“.
However, the body has not shown any sign that this will happen, beyond the fact that the negotiations have not been interrupted. Good intentions are on the table, but Argentina’s claim that the Monetary Fund advance disbursements scheduled for the second part of the year remain in limbo.
The Government returns to bet on a gesture of the IMF to obtain dollars.
Will there be news in the next days? There is no sign that that will come to pass. There is no official information, but it is true that Washington is demanding a devaluation to admit the government’s request.
For that very reason, the next two weeks will be key. Times are speeding up, basically, because the BCRA does not have any other foreign currency and Massa depends on the cereal companies and producers increasing their foreign currency settlements.
There is also the key to the announcements of the last hours. The Government needs to extend the stability of the financial dollars so that the dollars of the meager soybean crop appear.
It is the necessary condition. It will be enough? Seeing is believing.
