Anchoring exchange-rate expectations for further inflation slowdown

ARGENTINA - Report 16 Jul 2024 by Domingo Cavallo

During the last few weeks there has been very good news on the course of inflation. But two sets of side effects of the stabilization policy create doubts about its sustainability: the widening of the gap between the blue-chip swap rate (CCL) and the official exchange rate (which many observers interpret as an indicator of excessive appreciation in real terms) and the deepening of the recession.

So far, to tackle the first side effect, the government has reassured the markets that it will eliminate the remaining sources of monetary expansion, including those related to the purchase of foreign exchange by the Central Bank.

To tackle the second side effect, the government is actively trying to convince real investors to announce and start implementing the projects that qualify for the recently approved incentive regime for large investments ("RIGI" in Spanish). Additionally, it expects that the disinflation itself will increase the real income of workers and retirees and generate a recovery in consumption.

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