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Argentina's money printing central bank raises policy rate to 45-pct

Aug 14, 2018 10:04 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - Argentina's central bank, which is notorious for money printing and currency collapses, has raised a key policy rate to 45 percent from 40 percent, amid new weakness in the peso.

The peso had collapsed from around 16 to 28 to the US dollar with most of collapse coming after April. Inflation had already shot up to 29.5 percent by June.

Soft-peg central banks which generate permanently depreciating currencies end up with very high nominal interest rates.

Banco Central de la República Argentina said the 45 percent rate for its Leliq (a type of 7-day repo security) will remain at least until October.

The money printing soft-peg is under a 50 billion US dollar International Monetary Fund bailout.

The central bank has tried to operate an 'inflation targeting' framework from 2016, with the fatal Achilles heel of formal foreign exchange auctions with declared proviso to "operate in the foreign exchange market to strengthen its balance sheet and to avoid unreasonable fluctuations."

The forex auctions and the commitment to 'avoid unreasonable fluctuations' make the Argentina's peso a peg which is incompatible with inflation targeting.

Sri Lanka is also trying to go into inflation targeting with foreign exchange auctions.

Economists have called for the central bank to be abolished and the country to be dollarized to escape the twin problems of a soft-pegged central bank and governments which use the central banks' ability to print money and cut rates to run deficits. (Colombo/Aug15/2018)


 

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