PHOTO ARCHIVE PRICES. Accelerating inflation makes government plans funny.
The announcement of the BCRA is not positive, but quite the opposite: not only is it the same, but also the intensification of what has already been done, the Economi & Regions (E & R) consulting house warned in its latest report published on Friday. . No changes, the results will remain the same. By intensifying, the government is trying to prolong short-term pseudo stabilization at the cost of increasing costs that society must pay later in time: more devaluation and acceleration of inflation. It must be clear that this account will arrive sooner or later; not for a long time.
From the beginning, the current monetary policy was inconsistent in dynamic terms, which prevented good results. In other words, when politics is inconsistent in real terms, the results end up inexorably bad. And politics is finally abandoned. At best, a dynamically inconsistent policy will only yield acceptable results in the short term. But sooner or later, he said
the central results will disappear and remain only poor.
In this context, E & R reminds us that the current monetary program will achieve a pseudo short-term stabilization that will be completed sooner rather than later. Why? Because said pseudo-stabilization is mounted on non-solid bases, i.e. artificial and unsustainable appreciation of the exchange rate achieved by LELIK and without credibility. In that sense, the consultant reiterated that when inflation could not drill a certain monthly inflation rate for several months, expectations would change, pressures on the currency would recur, inflationary expectations would increase, and inflation would be accelerated again after
movement of the dollar. In fact, E & R expected that the first movement or indicator in this respect would be an increase in the interest rate.
In particular, LELIK's interest rate rose from 43% to 64%, reflecting the weakening of demand for money. An increasing interest rate is needed to maintain an ever-increasing exchange rate. BCRA determines the amount of money by setting LELIK, and the market determines the higher interest rates. Demand for money in a wider sense weakens; and her colleague inevitably has more appetites for the dollar and more inflation. Even with the expansion of the "zero" monetary base, we must be clear that the lower demand for money is higher than the dollar and higher inflation.
In this (critical) scenario, BCRA has just announced that it will extend the issue of a monetary base or policy by the end of 2019. This means that the "zero" monetary issue will expand during the second half of this year, expanding from July to December. Your partner will also have more LELIK and more interest rates. The announcement of yesterday's monetary policy has increased the dynamic inconsistency of monetary policy.
Dynamic inconsistency has been expanded, since the measures of economic policy in which agents are no longer believed to be accentuated. The public was no longer believed in the current central policy and therefore their expectations were completely inconsistent with the objectives of the BCRA.
This lack of belief was not free. First, agents did not "sufficiently" reduce their inflation expectations; and then they went upstairs. In this scenario with inflationary expectations that did not fall and then rose, the BCRA's inflation monetary policy did not benefit, but only the costs. Inflation did not fall, the stability of the exchange rate was only temporary and the interest rate was not reduced.
However, the costs were clear and were higher than originally anticipated. The level of activity has fallen, unemployment has increased, real wages have fallen, and poverty has grown more than expected. That is, there are no benefits and all costs; characteristic of dynamically inconsistent policies, warns E & R.
With announcements on Thursday, since there is no, nor will there be credibility, the benefits are hardly appearing. Expectations from inflation will not fall, but exactly the opposite. And if inflationary expectations do not fall, inflation will not fall. Moreover, inflationary expectations will grow and inflation will grow. However, due to more LELIK and the sale of Treasury bills (Treasury will sell 9000 MM USD?), The government will try to maintain a nominal dollar within high inflation, betting on the appreciation of the real exchange rate with the election
And in the context of low credibility, the appreciation of the course for election purposes is cannon fodder for more expectations of devaluation and future inflation. BCRA policy costs will increase over time. More costs and no benefits increase the chances that current BCRA policies are usually closer to the October and November elections. In addition, we must keep in mind that an electoral cycle could increase complications by promoting the fall in demand for money.