4 Min Read
BUENOS AIRES, Dec 15 (Reuters) - As Argentina's economy remains mired in recession and high inflation one year into President Mauricio Macri's term, economists have begun to doubt the central bank can reach its inflation targets after rate cuts some have called unjustified.
The monetary authority, run by former chief of Buenos Aires city bank and Macri-appointee Federico Sturzenegger, is trying hard to restore credibility and independence that was largely lost under the previous government.
Sturzenegger and the rest of the board raised eyebrows among economists, however, when they lowered rates for four straight weeks starting Nov. 8. It was a move that some said looked aimed at boosting growth rather than fulfilling the bank's inflation-targeting mission.
"There's no doubt that in the month of November, the central bank was acting politically," said Rodolfo Rossi, an orthodox economist who served as central bank chief in 1989 and 1990, noting that further deterioration in the recession-stricken economy could have led to layoffs or unrest in December, a time of frequent protests in Argentina.
Finance Minister Alfonso Prat-Gay has praised the cuts, telling reporters earlier this month that lower rates would lead to more investment, consumption and growth.
In September, Sturzenegger announced specific inflation targets through 2019, making the bank's mandate of lowering inflation, rather than boosting growth, clear as it tries to normalize monetary policy.
The central bank's stated independence under Macri have been welcomed by economists and markets, after the previous board largely obeyed former populist President Christina Fernandez's directive to print money to finance deficits and fork up foreign currency reserves to prop up the peso currency.
But the November cuts tested confidence in the new inflation-targeting regime. Weekly cuts continued despite data on Nov. 10 showing October inflation of 2.4 percent, well above the central bank's goal for average monthly inflation of 1.5 percent for the final quarter of the year.
Data on Thursday showed November inflation cooled to 1.6 percent, still above-target.
October inflation was particularly high because of the removal of subsidies for home-heating natural gas, a one-time factor. Sturzenegger has said rate decisions are "prospective," and the October inflation figure had no bearing on its November decisions.
"How strange, they lower the rates when inflation rises," Sturzenegger said at a conference on Wednesday, addressing the central bank's doubters. "No, in reality we kept the rate high in September because we knew October was complicated."
Economists' expectations for 2017 inflation increased to 20.2 in a central bank survey published in early December, up from 19.7 percent in the previous month and well above the central bank's target range of 12 percent to 17 percent. The benchmark policy rate currently stands at 24.75 percent.
"Since inflation expectations were on the rise, it was not clear what they were responding to," Mauro Roca, an economist at Goldman Sachs, said of the November cuts, noting that core inflation data also surprised to the upside, while the recession was lasting longer than expected and the peso was appreciating.
But the central bank has kept rates steady during the first two weeks of December, waiting for a more opportune time to continue cutting rates, which Roca said showed its November behavior will likely be "the exception, or a blip" in what has so far been a consistent, and successful, focus on inflation targeting.
Rossi said he expects the central bank to "correct" for the November rate cuts with a more hawkish stance next year. (Reporting by Luc Cohen; Editing by Caroline Stauffer and Bill Trott)