(MENAFN - Gulf Times) Argentina eased its inflation targets for the next two years, allowing the central bank to pursue looser monetary policy in a bid to support a weak economic recovery. The peso plunged the most in two years.
The monetary authority will now aim for inflation of 15% in 2018, up from a previous target of 8% to 12%, Treasury Minister Nicolas Dujovne told reporters in Buenos Aires on Thursday. The government also relaxed its 2019 inflation target to 10% and set a goal of 5% for 2020.
The decision to move inflation goalposts comes as President Mauricio Macri misses this year's 12-17% target despite a monetary tightening campaign that is beginning to weigh on economic growth. Disagreements between central bank chief Federico Sturzenegger and other members of Macri's economic team have simmered below the surface throughout his two years in office, with some pushing for lower rates to help lift the economy out of recession.
'By making our objective more gradual, this will allow for an easing of monetary policy, Sturzenegger said at the conference, flanked by Dujovne, Finance Minister Luis Caputo and Cabinet Chief Marcos Pena. He added that rates are currently calibrated for reaching an inflation target of 10% by the end of next year.
The central bank chief had previously argued that the quickest way to achieve sustainable growth is to tame inflation. Prices rose faster in the first months of this year, according to him, because the bank was too fast to reduce its benchmark rate last year. This year, Sturzenegger has raised borrowing costs by 400 basis points to 28.75%. Economists currently expect inflation to slow to 16.6% by the end of 2018, according to a monthly survey carried out by the central bank.
'The target change is theoretically reasonable, considering that it was too aggressive, but at the same time the message could backfire, Alejo Costa, a macro strategist at BTG Pactual in Buenos Aires, said by email. 'For the economy, it will mean a more competitive exchange rate and lower real rates, which will favour growth at the margin.
BTG now expects the central bank to cut rates as soon as January, compared to its previous forecast for a March reduction. That will allow the peso to devalue further, boosting exports, but will come at the cost of the central bank's credibility which had already been eroded by missing inflation goals, Alejo said.
The peso weakened 4.1% to 19.2 per dollar after the decision, extending a nine-day losing streak. It was the largest decline since Macri lifted currency controls and allowed the peso to float in December 2015.
The new inflation target may help ease some of the pressures on Argentina's economy. Sturzenegger's hawkish stance has had a knock-on effect on the local currency as investors have piled into peso-denominated instruments that yield as much as 10% in real terms. While the peso is the worst performing emerging market currency, in real terms it has strengthened against its 12 main trading partners, according to a multilateral exchange rate index produced by the central bank.
An overvalued exchange rate is hurting exports. Argentina posted a trade deficit of $1.5bn in November, it's largest on record. The current account deficit is likely to close the year at 5% of gross domestic product and continue ballooning in 2018, according to Goldman Sachs.
There are signs that a tight monetary policy is having an impact on growth. The economy contracted 0.3% in September from a month earlier, according to revised figures published by the statistics agency on Wednesday. Earlier this year, Macri's government eased its primary fiscal deficit targets for 2018 and 2019 in a bid to stimulate an economy that contracted in 2016.
The changes mark a defeat for Sturzenegger, Eurasia Group's Daniel Kerner said in an emailed report. It's clear that future inflation targets will have to be negotiated by the central bank with Macri's economic cabinet, he wrote.
Argentina is not alone in rethinking its inflation targets although most other economies face the challenge of consumer prices rising too slowly. New Zealand's new government has asked its Reserve Bank to balance its price goal with another aimed at jobs. Former Federal Reserve chairman Ben S Bernanke has argued that the Fed's goal needs a shake up, while the Bank for International Settlements suggests central banks should consider variables such as asset prices and financial stability.