Who needs a nominal anchor? Although most central banks use a policy rate to anchor inflation that weighs expected inflation and GDP dynamics, the Argentine central bank (BCRA) is now following a fully passive approach, where monetary policy accommodates to money demand. It is now the BCRA’s policy to accommodate monetary expansion with price expectations, private-sector credit, exchange rate policy and – fundamentally – the treasury’s funding gap.
According to analysts such as Alejo Costa, head strategist at Puente, an independent investment bank in Buenos Aires, this passive (or endogenous, in BCRA’s words) approach to monetary policy means that directionality goes from current prices and output to money supply and short-term ‘policy’ rates.
Orthodox inflation targeting, where the policy rate is based on expected inflation and economic activity, anchoring current inflation and affecting output, has been eschewed. In the BCRA’s mindset, inflation is driven mainly by supply factors, oligopoly power and external shocks; in the BCRA’s view the use of interest rates or the monetary base as nominal anchors are ineffective and only lead to an unnecessary contraction in output.
The directionality from money demand to money supply and policy rates means that economic activity, the velocity of circulation and the current price level determine monetary policy. Argentina’s government has targeted those three variables to control inflation, as opposed to using interest rates or money supply. Fiscal policy has been used to tame interest rates and boost public investment. Different restrictions have been imposed to contain money demand and the velocity of circulation, and tariffs on public services have been rigidly controlled. In February, a price freeze on consumer goods (mostly affecting the food and beverage industries) was introduced with the goal of containing salary negotiations and, thereby, inflation for the remainder of the year (or at least until October, when mid-term elections take place).
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