The Economist Luis Secco analyzed the central bank’s recent announcements on the exchange rate regime and found that while the flexibility was “welcome”, the opportunity to give the changes “greater force” was “missed”. In dialogue with Fontevecchia modefrom Net TV And Radio profile (AM 1190) explained that the decision to maintain inventories and the logic of “phasing” prolongs “uncertainty” and increases “inflationary inertia”.
Luis Secco holds a degree in Economics from the National University of La Plata and a Master’s degree in Banking Disciplines from the same university. He served as Economic Advisor to the Presidency and Director General for Strategic Analysis at the State Intelligence Secretariat. From 2000 to 2012 he was director of the consulting firm Perspectivas Económicas.
Continued decline: Country risk breaks 600 basis points after central bank announcements
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Immediately after the Central Bank President made the exchange rate announcements, you produced a very detailed report. What do these changes mean?
Firstly, I think it’s a somewhat welcome flexibility as far as the bands that provide additional weight strengthening is what we normally refer to as a real appreciation of weightwhich would further jeopardize the tradable sectors of the economy, those that export and those that substitute imports. While this is welcome, I think it’s a missed opportunity.
The downside is that we haven’t given up on the shares. We are creating a new flexibility while maintaining the shares of companies, the capital controls on these companies, which is clearly a much greater anomaly than that of the adjustable bands, which are also a rarity within the global economy and the stabilization programs. And then there’s an additional element that I don’t think I like that much either, which is the idea of phases. The impression is that this is another phase in a stabilization process and perhaps it was a good time to move away from the idea of phases and try to ensure that expectations are aligned with the idea that this is the final program and not a phase within a program.
Therefore I would say that the measure is not bad. The announcement of dollar purchases that accompanied this change in band(s) also seems positive to me. I think the government is having a hard time, but they recognize all the things that are identified as a problem. But it’s not much of a purchase announcement either. Keep in mind that it would supposedly be up to 5% of the daily market volume. That means between 20 and 25 million dollars a daywith which we speak in 20 working days 500 million dollars per month. And then on the other hand they tell you that they are going to buy 10,000 million. So it’s like you need to calibrate this part of advertising a little better and see in practice what happens.
One finds two tendencies. The vast majority of economists consider this a positive step forward and recognize that maintaining the current system would exacerbate the lag in the exchange rate. Ricardo Arriazu, on the other hand, called it nonsense and complained that the bands were of no use. How can these two positions be explained to the layperson?
I would say it’s also a lot more than two, because they say economists agree on 99% of things and we only discuss the 1% we disagree on. There can be different views. I had the pleasure of being there Ricardo Arriazu I taught a few courses back then and learned a lot from him. In your opinion, it’s probably nonsense considering it’s an anomaly. consists of going back and forth over models or programs that are not very general and cause doubt and uncertainty. For example, I’m sure Ricardo thinks that this leads to some inflation inertia, which is not desirable in a process of disinflation or in a process that needs to show that inflation returns to a downward path after several months. This makes it a little more difficult to achieve in the short term.
That is the main problem for me An announcement is made and the opportunity to give that announcement greater impact is lost. We’ve been talking about this for a long time, it’s still like everyone expects something. It’s like the expectations don’t click in the end and say, “This is the model, this is the program, I have to adapt to it and I go here and trust that this time it will be different.” That still costs a lot and any announcement that is made or any policy change that is made falls a little halfway there. Everyone has told you that you are on the right path, but that’s not all. The opportunity is missed and I think that is the main criticism. That is, why do this when you could do something much more energetic and perhaps take a little more risk? But if you don’t take the risk now, when will you take it? They won an election and have the support of the North American government. I don’t know if there’s a better opportunity to create a more definitive program.
The economist most listened to by Milei criticized the new measures on the dollar: “nonsense”
An economist said that in the first two years of government, reducing inflation was the priority, now reducing country risk and if inflation has to be increased a little so that country risk goes down, inflation becomes secondary to reducing country risk, because if country risk does not go down, there is no way to renew the debt, and if not, the country would eventually fall into default. Is this interpretation correct?
I believe that the bet to reduce country risk is not so much based on indexing the bands, but on buying dollars. It seems to me that the market expects country risk to fall Treasure and from Central Bankthe ability to accumulate dollars to pay off the debt in dollars and not have to resort to new debt or bailouts. So I think the bet comes more from that side. We are talking about inflation that is at 2% monthly and is likely to stay there. Is the government now less interested in inflation than before? Yes. But if it gets to 3% or more, I don’t know if he won’t say, “I don’t care because I’m de-risking the country.” Even if that happens, country risk may not decrease.
I meant, for example, that the goal was to get to 1%, and we’re clearly at 2% or something. So if the floating exchange rate peg had remained at 1%, inflation could probably have approached 1% at some point in the second quarter. Now it will certainly continue with a two lead in the second quarter, or very likely.
I’m not sure about that, because the 1% was more than a prediction, a wishful thinking. The sliding peg at 1% or the regular monthly adjustment of the range at 1% did not ensure that inflation was at 1%, or as I said Javier Mileiat 0%. It seems to me that they were projections that did not receive much support. In fact, if you looked at the average of the forecasts sent to the market, they were all between 1% and 2% monthly. They’re probably moving up slightly now, but it seems that way to me for disinflation further powerful, expectations have to click.
When I see a government that shows me that it is afraid of floating, that shows me that it is afraid of lifting capital controls, then I see that it is a program that is not yet fully consolidated. So no matter the speed at which the band adjusts, it creates inertia and expectations of a future correction and that is a waste in my opinion right now. This expectation of a future correction leads to a process with a higher average inflation rate than would exist without this expectation. Above all, because it reflects a certain doubt about the soundness and consistency of the program, because countries with consistent, sound economic policies have no reserves and no adjustment bands. It is as if there is a mechanism there for forming inflation and depreciation expectations and we cannot completely eliminate this eventual correction that could create a problem.
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Diego Giacomini said that you are the best economist in Argentina. And coming from an Ultra, ultra-Orthodox And from the Austrian school of economics, I put it in context: that a person like you says that inflation is not just a monetary problem, because obviously you don’t have a deficit, you have a budget surplus, you had the dollar settling at one, and inflation was at two or something, which, as you say, is due to various elements that are not just monetary. In other words, to some extent you agree with the multicausality of inflation, right?
Obviously the rules are monetary in nature, but if there is a disinflation process in which relative price corrections are imminent, then of course there are such rules Inflation inertia. Inflationary inertia is when you look around and you see prices, some ahead and some behind, and you move forward a little bit, and the price behind you moves forward a little bit. And here there are some prices that are being pushed down that are critically important, namely the rates and the dollar. So if one assumes that such corrections will occur in the future, so that relative prices move into a more sustainable pattern over time, in the end the inertia remains. And this is where the mechanisms of expectation formation are crucial.
The idea of the stimulus package was to put everything together and announce it. That made you say, “Hey, but this is a different geography. There’s a different program here.” And it seems to me that the phases threaten this idea of a package. The government has done this with some delay to try to influence its story as little as possible, but obviously there are missed opportunities and it seems to me that the market is taking this into account. And the program actually makes it possible to accumulate reserves at the rate promised by the government, which is still a big unknown. I believe that in this area there are also statements that aim to model expectations, but which are not met in practice.
And let me tell you about the amount of money. We have often heard the President say that the amount of money is fixed, and that is not true. The money supply has grown and become very volatile, and that’s why we had the volatility we had in interest rates. So there is still a lot to do in monetary policy.
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