May 15, 2019. Guido Sandleris, BCRA Governor, held a press conference.
Find below his speech.
Good afternoon. Thank you all for coming.
A few minutes ago, the National Institute of Statistics and Censuses (INDEC) released the inflation figure. April’s inflation rate was 3.4%. This means a significant decline against March.
The economic forces that reduce inflation are at work. Our monetary policy is tight and we are recovering the basic macroeconomic equilibrium: fiscal balance, competitive foreign exchange rate and undistorted relative prices.
Inflation has taken a downward trend once again but it is still quite high. I am aware of the impact these inflation levels cause, in particular, on the poorest sectors. For that reason, we will hold to our monetary policy to fight inflation.
The monetary base zero growth scheme has been in place for nearly 8 months. The BCRA overperformed its monetary base target during all the months the scheme has been in force. However, as we had already anticipated, inflation performance was not linear. In the first 3 months, inflation dropped from 6.5% monthly in September to 2.6% in December. In the three months that followed, it went from 2.9% in January to 4.7% in March. And in April it went down again, as I had forecast a month ago.
What is the reason for this inflation performance difference in the first 2 quarters of our monetary scheme implementation? And why did inflation decrease in April? Answering these two questions will let us understand why inflation will go on decreasing in the months to come.
In the first three months of our monetary scheme implementation, there were two elements that, together, helped to reduce inflation. These elements were a stable foreign exchange rate (despite some appreciation in the first months) and limited increases in regulated prices (there were hardly any rises in public services rates in the third quarter last year).
The concentration of rises in most public service rates in the first quarter of the year triggered inflation once again. In addition to the direct effect in the index generated by these rises, they contributed towards increases in the prices of a wide range of products. This way, the foreign exchange rate was the only price anchor. When the foreign exchange rate depreciated in March, the consequence was an inflation leap.
In April, the two elements that had contributed towards lowering inflation in the third quarter of last year were present once again. On the one hand, the national government announced that there would hardly be any rises in residential public service rates for the rest of the year (also shared by some provincial governments). On the other hand, the foreign exchange rate remained fairly stable.
I have many times highlighted how important it is to lower inflation without taking any unsustainable shortcuts. In fact, I have particularly referred to some of our recent history events in which public service rates and/or the foreign exchange rate were lagged in order to beat inflation in the short-term at the expense of future sustainability. We will not make that mistake. In the last months, the foreign exchange rate depreciation has been lower than the inflation rate. However, it did not involve the adjustment of external imbalances because we were based on a competitive foreign exchange rate. In relation with residential public service rates, we do not expect any rises in the coming months, given increases took place in the first quarter.
I would like to refer to the relationship between our monetary base target, interest rates, the foreign exchange rate and the inflation rate. It is usually said that monetary policy works through two direct channels: the credit channel and the foreign exchange rate channel. This is valid for both monetary aggregates and inflation targeting schemes. There are very few countries in the world which use the monetary aggregate targeting scheme at present. The main reason for no longer using this scheme in the world is that it creates significant interest rate volatility. This, considered a problem in other countries, is a positive characteristic of the current scheme in our country now.
In our country, the foreign exchange rate channel is more significant than the credit one since our credit market is smaller, so the cost of the foreign exchange rate volatility is lower. On the other hand, the quick interest rate adjustment over these months in view of the changes in the financial market conditions has contributed towards reducing foreign exchange volatility. So, for instance, in the presence of the worsening of financial conditions, the interest rate immediately increased and the foreign exchange rate moderated its volatility.
Those countries with a much better anchor on inflation expectations had adopted inflation targeting and had not remained within the monetary aggregate schemes. By virtue of this, a sudden depreciation in their foreign exchange rate did not have such a significant effect on inflation as is the case in our country. For that reason and for having a more effective credit channel, they chose to keep a more stable interest rate.
The present scheme helped to moderate foreign exchange volatility. In nearly 8 months, the foreign exchange rate went from ARS41.50/USD to ARS45/USD. In this same period, there was a depreciation of more than 8% in a challenging context.
The context is internationally challenging because the two main economies in the world are undergoing commercial disputes and this affects the rest of the economies. In addition to this international scenario, another factor is the uncertainty associated to the next presidential elections in our country.
Under these circumstances, monetary policy must be tight to protect our currency and foster domestic savings. We are already doing so. Since we launched the new scheme, monetary policy rate has always been positive in real terms. This had not happened in the last 15 years. The average real interest rate that depositors received from time deposits in the last eight months was also positive. This implies that they have beaten inflation. This should be the rule and not the exception.
Today we are faced with positive news but we know there is still much to be done. We will go on working to continue lowering inflation in our country.