Federico Sturzenegger was a member of the “Rule of Law” Panel on Wednesday, September 14, 2016, together with Gabriela Michetti, Vice President of the Argentine Republic and President of the Senate (Argentina); Ricardo Lorenzetti, Chief Justice of the Supreme Court (Argentina); Emilio Monzó, Lower House Speaker (Argentina), and Jorge Familiar, Vice President for Latin America and the Caribbean (World Bank).
Argentina Business & Investment Forum is held from 12-15 September, 2016 at the Centro Cultural Kirchner.
Find below a transcription of Federico Sturzenegger’s presentation:
Moderator: Governor, does the Central Bank currently ensure the operation of the banking and monetary system, which is central to the country’s competitiveness and transparency?
Federico Sturzenegger: Thank you. It is an honour to be here with you today. Well, the independence of a Central Bank is so pivotal that all countries see it as a core element in order to have a stable macroeconomy; however, we are not used to this concept in Argentina. In fact, every time the BCRA holds a view somewhat different from that of the Executive Power, society feels confused and this is considered as something negative. In my view, this is an extremely positive sign evidencing such independence. That is why it is worth underscoring and insisting on the relevance of BCRA’s independence. The Central Bank’s main objective is to preserve the value of currency; I even think the President mentioned this yesterday. To this end, the Central Bank has to coordinate agents’ expectations in an inflation-free economy. In fact, we have been doing this in Argentina in an interesting fashion—without using the exchange rate as a tool to set expectations. In other words, inflation expectation will be adjusted downwards on the basis of the Central Bank’s credibility.
But credibility does not occur in the vacuum, it calls for the Central Bank’s independence. Take, for example, the fact that in Argentina we have elections next year. If the Central Bank were not independent, it could be influenced to take measures in a given direction. So, if the Central Bank were to conform to such objectives, then it could not generate expectations of falling inflation.
We discussed this with the then presidential candidate, who has been the current president of the country since last year. How do we build the BCRA’s independence? I should say that Mauricio Macri used to say “well, we will send a bill to congress. The first bill we will send will be about the Central Bank’s independence”. I told him “we are going to prove it in another way, we are going to do something different,” because Argentina has had considerable experience in trying to change reality by changing a law and then reality is not consistent with the legal framework and, consequently, an issue arises. So I added “we are going to be independent without amending the law, we are going to show that we can be organized and work independently at the BCRA without the need for those crutches or that institutional context”. And once we show the Argentine society that having low inflation is advisable and possible, they will raise to the challenge; only then institutional change will be possible. This model was followed by England 30 years ago when the Bank of England had high inflation levels. The credibility of the Bank of England was then built this way. Then, when England lowered its inflation rate upon a change of political authorities, Tony Blair stated “well, now we will consolidate the institutional framework of the Bank of England’s independence”.
All in all, I think this is a key issue. We are in tune with this topic, having a long-term standpoint. Results are quite clear. If you take a look at Argentina’s inflation rates in the past 9 months, 6% in April—obviously relative prices had to be adjusted following a decade when they had been frozen—, 4% in May, 3% in June, 2% in July, and 1% in August. I mean 1% and not ‘deflation’ because the increase in rates needs to be analysed and this situation may be reverted in a few months. In my opinion, indulgence is in this sense the biggest risk we have in Argentina today. A 1% monthly inflation rate is not appropriate for Argentina, it is still very high. This is the place where countries have started their battle against inflation. Argentina deserves and is even entitled to having an inflation rate comparable to that reached by developed countries and those that have underwent remarkable growth processes. Our commitment moves on in this way at present, which in our opinion is a key contribution towards society.
I would like to bring my presentation to a close by making reference to the case of Israel. I have just come from a meeting of central bank governors in Basel and I had the chance to talk with Karnit Flug, governor of the Central Bank of Israel, who told me: “Israel has a 2% annual inflation target and, at this moment, it cannot reach such 2% annual target because the rate stands at 0%.” She added that they recorded a 0% rate for 2 or 3 years and that the country cannot abandon such figure. She went on saying: “Can you believe that Israel had inflation rates amounting to 400% 10-15 years ago?” If 10-15 years ago somebody had told me that the Central Bank of Israel had problems to raise its inflation rate from 0% to 2%, I would not have believed it, but it happened,” and I think this will happen in Argentina.
September 14th, 2016