Former Economy Minister Domingo Cavallo pointed out that support for a strong program depends on low inflation and key relative prices set by the market, rather than on government intervention.
He said that for free markets in goods and services and economic openness to generate increasing levels of welfare, “it is necessary that inflation be as low as possible, but at the same time that two key relative rates, the real interest rate and the real exchange rate, arise from the balance of savings and investment driven by the expectations of savers and investors and not from erratic government interventions.”
Regarding the measures currently being discussed in Congress, Cavallo noted that the already approved system of incentives for large investments, along with structural reforms – such as labor market reform and tax reform – constitute “important components to support a sustainable economic growth process.”
But the economist warned that, “with the exception of the 2026 budget,” these structural reforms “will not significantly affect the level of economic activity and the inflation rate in the short term.”
In a new post on his blog, the former minister focused the analysis on the need to remove or ease financial and exchange repression that has led to “very high real interest rates and an exchange rate far removed from official expectations.”
Cavallo noted that the rise in real interest rates has already caused “significant damage to debtors of banks and financial entities.” This is reflected in “an increase in non-payment cases by families and companies alike, and in the losses recorded by banks on their balance sheets.”
Inflation, prices and exchange rates
Regarding inflation, high interest rates generate “inflationary stagnation” because they “make production costs more expensive” and force producers to offer their products “at prices that rise at a rate not far from the interest rate, on pain of incurring losses that might drive them out of the market.”
Cavallo also warned of “the damage caused by the overvaluation of the non-convertible peso,” and that “the real exchange rate is not balanced” and is caused by “restricting the movement of capital (shares for legal entities) or imposing and maintaining high real interest rates. Or both at the same time, as is happening now.”
In addition, this overvaluation “encourages spending on tourism abroad and imports of consumer goods that can be supplied with domestic production at a balanced exchange rate.”
According to Cavallo, to correct these distortions, the only sustainable way to lower real peso interest rates is to “reduce the country’s risk profile.”
The former minister stresses that measures must be taken soon to accumulate reserves. He suggests that “the complete elimination of stocks and the purchase of reserves be arranged simultaneously.”