Argentina’s central bank has announced a slowdown in the peso’s controlled depreciation rate, reducing it to 1% per month starting February. The policy shift follows fresh inflation data that signals a more stable economic environment.
This marks President Javier Milei’s first adjustment to the crawling peg currency policy since taking office, signaling confidence in Argentina’s improving inflation outlook. Consumer price increases have recently hovered near their lowest levels since 2020. In November, Milei’s administration committed to reducing the peg to 1% per month, contingent on inflation remaining stable through the end of 2024.
“The exchange rate adjustment continues accomplishing its role as a complementary anchor in inflation expectations,” the central bank stated in a message.
Inflation Data Supports Policy Shift
Government data released earlier showed consumer prices rose by 2.7% in December from the previous month, marking the third consecutive month of inflation below 3%. This figure aligns with economists’ expectations. Annual inflation slowed significantly to 117.8%, a sharp decline from a peak near 300% last year.
The improved inflation figures have bolstered Milei’s popularity ahead of the October midterm elections. Many Argentines credit his administration for reducing inflation while maintaining a relatively stable exchange rate. However, any missteps in currency policy could reignite inflationary pressures, potentially undermining his party’s political standing.
Balancing Risks and Progress
Despite inflation exceeding 2%, the government had previously maintained the crawling peg at that rate. While Milei’s broader economic policies have garnered approval, critics argue that the currency policy has led to an overvalued peso, a scenario that has historically resulted in abrupt devaluations and political turmoil.
Milei has pledged to transition toward a “flexible exchange rate” by lifting Argentina’s currency controls later this year. However, the memory of a similar move in 2015 under former President Mauricio Macri, which triggered inflation and political challenges, underscores the risks involved.
Potential for a Managed Float
As part of the planned transition, Milei’s administration is reportedly considering a managed exchange rate system, or “dirty float,” where the peso would float freely within predefined limits. Details of this framework remain under discussion.
The proposed changes underscore the administration’s efforts to modernize Argentina’s economic policies while navigating the fine line between stability and reform. For now, the decision to slow the pace of depreciation reflects growing confidence in taming inflation, though the road ahead remains fraught with challenges.
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