Guido Sandleris: "The inflation in January was very high and it is very likely that the February inflation is also high"

Invited by the Freedom Foundation to outline the prospects that the Central Bank must fight against l & # 39; inflation, the president of the monetary agency, Guido Sandleris, badured that the task is more arduous than expected, but what the path of monetary discipline will bear fruit.

The economist said that January's inflation of 2.9%, was "high" and that "most likely is that February's inflation is also". "Inflation has been high for a long time, it was only less than 10% in just 17 of the 75. Does this mean that we have to resign ourselves to living with inflation? at all, "said the head of the BCRA, while explaining the reasons that in Argentina produce inflation and what is the path chosen to start eliminating it.

"We should not be discouraged by the results of the last decades. We will reach lower inflation and we will do it on a solid basis "said Sandleris during his presentation. He added: "Logically, if delaying the exchange rate and rates have short-term effects on the control of inflation, because these prices increase transient increases, but these corrections are necessary to reduce the rate of change. inflation permanently. "

The official was "sincere" and stated that the current situation had not been reached as planned. "The road was more difficult than we had imagined: the reversal of external financing in 2018 as well as the aforementioned errors led us to a contraction of the economy and to a situation of nominal instability. last year. " Expectations of inflation and inflation have risen sharply. "He stressed, therefore," he added, "we have launched a strict monetary base objectives system" and the organization aims to recover the lost credibility.

Sandleris is reminded that most Latin American countries with low inflation today have already experienced long periods of high inflation. He mentioned Brazil, Chile, Colombia, Mexico, Peru and Uruguay. "These countries have averaged over 20% inflation in 14 of the last 20 years," with figures below 10%. "I am aware of the suffering caused by inflation among our citizens, especially the most vulnerable, and that is why the reduction of inflation is the main objective of this central bank" said the head of the plant.

About the need to lay a solid foundation for gradually reducing inflation, the official said that there are ways to contain prices quickly, for example by delaying the exchange rate or delaying rate updates. But he argued that these mechanisms generate other distortions that must be corrected later and that generate much more drastic price impacts.

"We all know that there is a link between the exchange rate and prices, and that this strategy can be effective in the short term.. Imported and exported products are becoming cheaper, inflation expectations are being mastered and results are emerging, "said Sandleris, who added:" The problem is that, Meanwhile, an imbalance of the external sector is generated, which is maintained while the rest of the world is ready to finance usbut this results in a depreciation and a rise in inflation once this funding is cut.

He also raised that Another way to contain inflation is to delay the prices of regulated goods and services, such as fuel, electricity, gas or transport. It stimulates, on the demand side, the use of these goods and services that does not match their real cost to society. And on the supply side, Sandleris said, the investment is discouraged, the supply and quality of service decrease. "When financing ends, as in the case of the exchange rate, a re-composition of the price back, an increase in inflation and a new inflationary episode that weakens again the confidence in the national currency, "he said.

Sandleris has focused on the goal of this government's focus on reducing the budget deficit, as this red has led the BCRA to finally resort to its funding from previous governments. And the resulting monetary problem generates inflation, he said.

"In the past three years, we have made progress, both in correcting the short-term shortcuts used to contain inflation and reducing the budget deficit." I'm not saying it was done at the right speed or with the best coordination. In fact, I do not think this is the case, but I am convinced that we have been able to build a solid foundation to start reducing inflation in a sustainable way, "he said.

Thank you very much for the invitation to this event. I want to take this opportunity to talk about the main mission of the Central Bank, the fight against inflation.

Beyond the specific factors that help to explain it, inflation in January, at 2.9% monthly, was very high and it is highly likely that the February data are also high. But today, I want to make an badysis of inflation in a broader perspective.

Argentina has much higher inflation than almost every country in the region. Excluding Venezuela, which is experiencing an unprecedented humanitarian crisis, our country is experiencing the highest inflation in South America.

Inflation has been high for some time. This would have been over 20% per year in 12 of the last 20 years (I think the potential is high because for many years, INDEC statistics were no longer reliable). Even worse, these years of very high inflation are concentrated in the most recent period, which extends from 2007 to today. Moreover, we know that this is not a recent phenomenon. Inflation was less than 10% in just 17 of the last 75 years.

Does this mean that we have to resign ourselves to living with high inflation? No way. Most Latin American countries where inflation is low have already gone through prolonged periods of high inflation. Take the cases of Brazil, Chile, Colombia, Mexico, Peru and Uruguay. For each of them, let's situate ourselves when they have managed to reduce inflation to less than 10% and keep it below this level. These countries have experienced average inflation over 20% in 14 of the last 20 years.

I am aware of the suffering caused by inflation among our citizens, especially the most vulnerable, and that is why the reduction of inflation is the main objective of this central bank. We should not be discouraged by the results of the last decades. We will succeed in reducing inflation and we will do it on a solid basis.

What do I mean by reducing inflation on a solid foundation? He has sometimes been tempted to reduce inflation by delaying the exchange rate. This route was used, for example, in the Austral Plan, the convertibility plan, the exchange rate in effect until 2015 and, to a certain extent, also in the early years of the current government.

We all know that there is a link between the exchange rate and prices, and that this strategy can be effective in the short term. Imported and exported products become cheaper, inflation expectations are contained and results appear. The problem is that, in the meantime, an imbalance in the external sector is generated, which is maintained while the rest of the world is ready to finance us, but which ends with a depreciation and a rise in inflation once. this funding cut. I'll fail if I say that when this happens, we return to the starting point because the increase in exchange rates causes damage to those who had a national currency at that time, which makes more difficult to convince them to stay in this currency in the future.

Another way to stabilize or contain inflation without solid fundamentals is to delay the prices of regulated goods and services, such as fuels, electricity, gas or transport. According to a book by Fernando Navajas, prices for the residential electricity price were delayed from 1945 to 1952, when the price of electricity was delayed by 51%, compared to 43% between 1973 and 1975 , 1981 to 1984, 49% and the record takes the period from 2001 to 2015 with 73%. The cycle is very similar to the exchange rate. Some prices are artificially lowered, costs and inflation expectations are reduced and inflation is controlled in the short term. But in the meantime, it is created first, then an unbearable imbalance gets bigger. On the demand side, we encourage the use of these goods and services that does not coincide with their actual cost to society. And on the supply side, two things happen, the investment is discouraged and the supply and quality of service diminish. I do not have to remind you of the unsustainable fiscal cost of these policies. At the end of the financing, as in the case of the exchange rate, a downward re-composition of the price, an increase in inflation and a new inflationary episode that weakens again confidence in the national currency.

Under the previous government, the two short-term strategies were used at the same time, the exchange rate and the delay. However, with the level of monetary financing in the Treasury, inflationary pressures increased. This combination of policies temporarily limited inflation to 25% in 2015, while leaving the bases for accelerated inflation.

Most attempts to control inflation in our country share the common characteristic of not solving the fiscal problem and facing high budget deficits. The existence of a budget deficit eventually led to the use of the Central Bank to finance the imbalance. The resulting monetary problem generates inflation earlier or later.

Over the last three years, we have made progress both in correcting the short-term shortcuts used to contain inflation and in reducing the budget deficit. I am not saying that it was done at the right speed or with the best possible coordination. In fact, I do not think it was like that. But I am convinced that we have succeeded in establishing a solid foundation for beginning to reduce inflation in a sustainable manner.

The real exchange rate is now 59% higher than the level it had before the stock left. The current account deficit for the fourth quarter (seasonally adjusted and annualized) is 1.2% of GDP, 3.8 percentage points lower than in 2017.

The rate delay, which, as we have said, was a widely used instrument until 2015, is already largely corrected. Most of the efforts needed to make the rates honest have already been made.

Logically, if delaying the exchange rate and rates have short-term effects on controlling inflation, since these prices lead to identical transitional increases. But these corrections are necessary to reduce inflation permanently.

On the fiscal side, the primary deficit has been reduced from around 5% in 2015 to 2.4% of GDP in 2018. And there will be no primary deficit in 2019.

In short, we have almost completely corrected the three macroeconomic imbalances that led to the economy: the exchange rate, the tariff and the budget deficit. As I said, this puts us in front of the possibility of a lasting reduction in inflation.

I want to be honest, we did not arrive here as planned. The road was harder than we had imagined. The reversal of external financing in 2018 and the aforementioned errors led to a contraction in the economy and a nominal instability situation last year. Inflation and inflation expectations have risen sharply.

That is why, at the end of September, we launched a system of strict monetary base objectives. The central bank had lost its credibility and we decided that in order to start recovering it, it was necessary to offer the public, month after month, easily verifiable objectives.

We met or exceeded these goals in the first four months of the program. And we will do it again in February.

Financial volatility declined with this monetary regime and, even when they remained high, both inflation and interest rates declined. However, these processes are not linear.

The monetary regime is strict and we also implement it with great caution. This is what is needed for inflation to fall. We know that January data in this direction were not good and that there are still a few months with significant rate corrections.

That is why it is essential to maintain monetary discipline. The imbalances that have prevented inflation from receding regularly in the past are resolved or are about to be. We are already implementing a monetary policy aimed at reducing inflation. Now we must be persistent, knowing that the results are not immediate, but without a doubt, they arrive. This is evidenced by the cases of countries close to ours already accustomed to living with single-digit inflation. There is no reason why we can not do it.