Policy Clash Makes Argentina Own Worst Enemy on Inflation

Patrick Gillespie
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Policy Clash Makes Argentina Own Worst Enemy on Inflation

(Bloomberg) -- Argentina’s two core policies to appease investors -- a tight monetary policy and a faster rollback of subsidies -- are at odds with each other when it comes to slowing inflation.

President Mauricio Macri is removing subsidies on public transport and utility bills, causing regulated prices to rise significantly. On the other hand, the central bank’s benchmark rate of nearly 50 percent is supposed to cool inflation.

The plan is challenging Macri, who faces re-election this October in a vote that hinges on reviving an economy mired in recession.

"It’s a real policy dilemma, and there’s no getting around it," said Fiona Mackie, regional director for Latin America at the Economist Intelligence Unit. "This inflation adjustment is going to take a while to happen and it’s going to increase political risk heading up to the election."

While this paradox has existed to some extent since Macri took office in 2015, recent developments make the policy clash more extreme now. The central bank overhauled its policies last September to cut off inflation, while a deal for a $56 billion credit line with the International Monetary Fund requires Argentina to balance its budget this year.

Due to the subsidy cuts, electricity and gas will rise 35 percent on average nationwide this year for homes and small businesses. Public transport will go up about 40 percent.

Other factors are also putting pressure on inflation in Argentina, which reached 49 percent in January compared to a year ago. Prices on everything from food to mobile phones are being raised so businesses can recoup some of their losses, while salaries and pensions get an inflation-adjusted boost too. Still, regulated price hikes are expected to be the leading cause of high inflation through May.

For its part, the central bank is freezing the amount of money in circulation, maintaining high interest rates and enforcing a currency band to stabilize the peso and help head off more price pressures. Monthly inflation eased between September and December. But, prices then rose 2.9 percent in January, a reading higher than both analysts’ expectations and December’s figure.

The central bank has cautioned that consumer prices will remain elevated, and inflation is expected to be near 30 percent by end of year. Still, economists point out that concentrating the pain at the start of the year gives the government a better shot at showing tangible advances against inflation closer to October’s election.

"It will help in the future. A lower deficit in the long term helps reduce money printing and helps inflation," said Sebastian Rondeau, an economist at Bank of America Merrill Lynch. "It’s a conflict in the short-term between fiscal policy and inflation."

(Updates to add full year inflation forecast in ninth paragraph.)

To contact the reporter on this story: Patrick Gillespie in Buenos Aires at pgillespie29@bloomberg.net

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Matthew Malinowski, Bruce Douglas

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