# Time for Central Bank of Argentina independence

## Monetary financing has fallen sharply, but must now end

The inflation record in Argentina is not a good one. Visiting the museum opposite the Central Bank of Argentina (BCRA) in Buenos Aires, one can see there have been frequent inflationary episodes. In total, 13 zeros could have been added to Argentinian banknotes in the past century – something the current staff at the central bank know all too well.

When the administration of president Mauricio Macri took power in December 2015, annual inflation was spiralling upwards, and the BCRA was a ‘captured’ institution, providing monetary financing to the government to the tune of 5% GDP a year by 2015. Since then, much has changed. Inflation has fallen to less than 30%, and monetary financing now stands at around 1% of GDP.

The disinflation is all the more remarkable given it has taken place at the same time as the exchange rate has moved from a ‘fixed rate’ to a ‘dirty float’, and utility prices – fixed under the previous administration – have risen a multiple of times. But inflation remains far too high. At around 26%, it is well above the central bank’s upwardly revised target of 15% for the year. And mistakes of the past two years must be learned from.

### Damaged record

The revamped economics department at the BCRA has made two obvious mistakes in their inflation predictions during the past two years. The first resulted in cuts in rates between June 2016 to February 2017 (when rates stood at 38% with second half of 2016 inflation at 8%) that were too deep and too quick. The second error led to rates being cut by 150 basis points in January 2018.

BCRA governor Federico Sturzenegger, who must be credited with a remarkable transformation in the capacity and authority of the central bank during the past 30 months, takes responsibility for cutting rates too quickly. “With the benefit of hindsight, it would have been better not to have cut rates at the end of 2016 and the start of 2018,” he tells Central Banking in a wide-ranging interview.

Sturzenegger, however, consistently dismisses reports that the central bank was pressured by the government to soften its monetary policy stances on these occasions: “There were a lot of things said about pressures that have no reality in fact.”

That said, the central bank did bring forward its plans – which Sturzenegger says were already in the pipeline because of core inflation hitting 1.4% in December 2017 – to cut rates in January following the government’s decision to increase the BCRA’s inflation target for 2018 from a range of 8-12% to 15%.

### Learning from meltdown

Despite the recent change in the central bank’s inflation target – which still looks like a challenge to hit for 2018 – Argentina generally appears to have placed too much of a burden on monetary policy versus fiscal policy in its overall policy stance. This was highlighted in the International Monetary Fund’s latest Article IV report, which indicated the Macri administration would consider more ‘frontloaded’ fiscal consolidation should events require such a move.

The 20% fall of the Argentine peso against the US dollar and concerns about Argentina’s external debt servicing capabilities during past month make such a shift almost inevitable. The sell-off in Argentina forced the central bank to raise rates to 40%, and the government took the politically dangerous move to seek out exceptional access financial support from the IMF – an institution reviled by segments of the Argentinian population.

But the administration and the central bank’s efforts, not to mention confidence-boosting bond purchases by Franklin Templeton Investments, have demonstrated the ability of the authorities to listen, understand and react to changing conditions, and have reassured market participants – at least for now.