Buenos Aires, September 25, 2017. These 2017 Money and Banking Conferences were designed, like last year, on the basis of very simple concepts. The major concept is that they are policy-related conferences. The purpose is to listen and learn from those who have already faced many of the challenges the Central Bank of Argentina is currently facing. And I would dare say they have done so successfully. Average inflation in the countries from where we have representatives here today has reached 3.3% annually. Average inflation in the countries of the remaining central bank governors with whom I will share the panel tomorrow is 3%. Then, we can state that we have with us a group of people who know what they do and from whom I am sure we can learn a lot.
We have taken a practical approach and, thus, the format of this year’s conferences is compact. We have work ahead today afternoon and tomorrow morning.
As you know, the Central Bank is working on the basis of three core pillars. I would say that disinflation is the first pillar, followed by those of financial sector development and elimination of cash. This year’s conferences will be primarily focused on the first two objectives mentioned.
When we started the disinflation process, which began when this new Government took office, we distinguished four stages in this process. The first stage lasted the first three months and we could consider it an initial correction. It was a process where we had to deal with some liabilities we inherited and which forced us to absorb 25% of the monetary base over those first three months. It was an initial period of corrections and adjustments.
As from March 2016, we fully focused the monetary policy on disinflation. The interest rate stood at 38% in nominal terms. This led to fast disinflation of the Argentine economy. In fact, inflation stood at 1.4% on a monthly average over the second half of last year; thus, annual inflation stood at around 18% in annualized terms. Such a tight monetary policy, which began around March 2016, resulted, as I mentioned before, in fast disinflation in the second half of the year.
Naturally, as inflation began falling, nominal rates were adjusted to the disinflation process that was taking place and we started making projections. We had a monetary policy easing process which was quite gradual and which basically extended over the second half of 2016 up to February 2017. We have talked about this on many occasions; this easing process was, ex post, maybe excessive, leading to a rise in inflation in February, March and April this year.
When we saw this dynamics in February, we began a new contractionary cycle of the monetary policy as from March and which has basically lasted to date. This resulted, once again, in a new deceleration since May, placing inflation recorded over the last four months at 1.4%, the same figure we had recorded in the second half of last year.
Actually, I would say that the Central Bank is now exhibiting its most tightening monetary policy position. It is basically the game between monetary policy rates and inflation expectations. I would say this is the tightest moment of the monetary policy. As already mentioned, we are now aiming at a 1% rate for the last months of the year, which would give credibility to our 10% (+/- 2) target that we have set for next year and which is very important for us. What this means to the team leading the monetary policy here at the Central Bank is that the conditions for monetary policy easing are not present at this moment. The conditions for the easing of the monetary policy in the coming months are not present at all.
When we discussed this last year we said that lowering inflation would promote economic growth. Now, we can say that inflation is at the lowest levels on record in the past seven years. It has stood at 18.2% on average in the last for months in annualized terms. If we consider the last 14 months, inflation has reached 21%, once again, in annualized terms. In fact, following the deceleration of inflation observed in the second half of last year, and just as we had anticipated, the economy grew again; such growth was incipient in the third quarter but has been stronger since the fourth quarter onwards.
Then, why is it that low inflation comes hand in hand with growth recovery? Because low inflation has beneficial effects on the side of, both, demand and supply. For example, a fall in inflation raises consumer confidence and this may be observed statistically. A fall in inflation reduces the inflation tax and this, in turn, increases purchasing power and, above all, as we have always said, a fall in inflation entails a more profound equality in income distribution. This is so because it is a tax that affects the most vulnerable people. Then, a reduction in inflation alleviates the inflation tax while promoting demand. And a fall in inflation increases lending. Then, it also stimulates and helps demand through lending.
And also, above all, it is a supply shock. Because a reduction in inflation lowers capital cost, which has been taking place in Argentina in the past year. As inflation goes down, the price system works better. As inflation falls, pass-through falls too, which is another manner to measure how the price system improves. The pass-through, which had stood at point seven eight (0.78), around point eight (0.8) between 2011 and 2015, has reached point eighteen (0.18 ) in the last 15 months. This has also helped us.
So part of what we will be discussing, which I will summarize now, has to do with this process to lower inflation and how to summon strength and energy once again for the coming stages.
The second pillar has to do with lending. As I have just said, low inflation promotes lending. In fact, lending has gone up 20% over the past year in real terms. If we consider the past four months, when inflation has stood at 18% annualized, lending has been growing at a 60% annualized rate; these are nominal terms, but it is actually important in real terms. Rates in pesos have gone down from the values they had in 2015. Rates in dollars have also gone down from the values they had in 2015. In some cases, the drop in interest rates has been dramatic, for example, in the case of mortgage loans. Indeed, if there were not mortgage loans, you could think that the interest rate was infinite, and if there are not, then the price is infinite. And, today, people in Argentina are actually having access to mortgage loans at the lowest real rates in history and this has resulted in the growth of this market.
Bearing this backdrop in mind, we have organized the Conferences in three blocks. The first one analyses what the world is like now. Argentina has started a process of greater opening up to the world, more integration; thus, we want to know what the world is like now.
The second block resumes the issue of disinflation and looks at the challenges Argentina faces in this process. The third block revolves around growth challenges of the financial sector which, as I said before, has accelerated over the past few months but amidst a process that we anticipate will continue in the coming months and years, and hopefully, even beyond.
To talk about what the world is like now, we will start with Ernesto Zedillo, who holds a PhD degree in economics; it is an honor to have him here with us today. He has participated in debates on globalization all over the world and is an international authority in this regard.
Next, we will have a panel with Philip Lane, Governor of the Central Bank of Ireland, and Martin Eichenbaum, who is a professor at Northwestern University. They are both scholars and will give us their opinion on international economy. Phil has worked for a very long time on global imbalances and has a fully global view of all issues but he will give us his view focusing on Europe while Martin, on the contrary, will focus on the United States.
Then, we will have the afternoon panel, that will discuss disinflation dynamics. We have the honor of counting on the presence of three panelists. Carlos Fernández Valdovinos, Governor of the Central Bank of Paraguay. He won the world’s best central banker award last year. Economy in Paraguay recorded a 3.2% inflation rate last year and the average inflation in the past ten years has stood at 3.9%. So, I think we have a lot to learn. We also have here with us the Dean of all central bankers in Latin America, Julio Velarde, Governor of the Central Bank of Peru for the last 11 years. His country recorded a 3.2% inflation rate last year in annual terms and a 5.1% average rate in the last five years. Finally, we have Carlos Végh, World Bank Chief Economist for Latin America. He has studied disinflation processes in depth; whether they have to be based on the interest rate, on the amount of money or on the exchange rate; he studied the case of Eastern Europe, and has studied disinflation processes for a long time, so listening to him will be very interesting and enriching.
Tomorrow’s panel will be very interesting as well and will be about three countries whose financial systems have grown significantly in their disinflation processes. We will listen to Marek Belka, from Poland. The Polish financial system has three-folded since 1990. Marek was Governor of the Central Bank of Poland and the country’s Prime Minister. He also holds a very interesting view on global issues; however, here we will ask him to tell us about the challenges Poland faced as its financial sector was growing at such a quick pace.
Erkan Kilimci is the Vice Governor of the Central Bank of the Republic of Turkey and will tell us about the growth experience of the financial system, which increased five times from 2003 to 2016. Finally, it is also a pleasure to have with us Luis Linde, Governor of the Bank of Spain. The financial system in Spain doubled from 2001 to 2009. We want these panelists to share with us their experiences, and to tell us what things we must pay attention to in our own growth process.
Finally, Carmen Reinhart, professor at the Kennedy School of Government, will give a presentation; she will join both panels and will talk about the relationship between disinflation and the financial sector, so it will be a very interesting summary on how the previous topics are intertwined.
We will also have a final panel, which will be somewhat free in style, where all central bankers present here may ask any question they always wanted to make before but never dared.
September 29, 2017