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Argentina’s liberal president, Javier Millay, has tightened unusual currency policies that he says are essential to ending the country’s inflation crisis, slowing the monthly devaluation of the peso.
Prime Minister Milay last year allowed the official exchange rate of the peso to fall by just 2% in a month, or 22.8% for the year, even though consumer prices rose 117% in 2024 compared to 2023. This caused the peso to appreciate more than any other currency. It fell sharply in real currency terms last year, raising concerns among some economists about the competitiveness of Argentine companies.
Argentina’s central bank announced on Tuesday that the pace of currency devaluation on the so-called “crawling peg” would slow to 1% a month from February.
The move is expected to ensure a dramatic fall in monthly inflation, which has been Milley’s biggest achievement since taking office in the midst of a deep economic crisis in late 2023. The purpose is
Month-on-month inflation has fallen from a peak of 26% in December 2023 to 2.7% in December 2024, largely thanks to Mr Millais’ drastic austerity measures. Officials claim that the 2% currency devaluation has been one of the main drivers of continued price pressure.
Luciano Sigalov, an analyst at Bull Market Brokers in Buenos Aires, said, “All eyes are on the midterm elections (to be held in the second half of 2025), in which candidates supported by Milay are likely to do well, and the authorities are “We want to make sure we keep inflation under control.”
Millay said slowing the devaluation is an important step toward lifting Argentina’s strict currency and capital controls, which are a top concern for foreign investors, and has pledged to do so by 2025. .
But the peso’s real appreciation will also accelerate, delaying the rebuilding of Argentina’s central bank’s minuscule foreign exchange reserves. That’s what “the market recognizes as the biggest risk to the Millais program,” said Nellie Persichini, director of the agency. Research by financial services company GMA Capital.
The rapid real appreciation of the peso under previous Argentine governments ended in a sudden currency devaluation and economic chaos as the central bank ran out of cash to support a strong currency.
Millay argued that accelerating the devaluation of the peso would lead to new inflation and undermine the success in macroeconomic stabilization that enabled Argentina to emerge from recession in the third quarter of 2024. did.
He said Argentina needed to remain competitive by deregulating the economy and lowering taxes and borrowing costs for businesses, rather than devaluing its currency.
Persichini said the weakening real in neighboring Brazil and weak global prices for Argentine exports such as soybeans, as well as the strong US dollar, could have a negative impact on export revenues, putting further pressure on Millei’s currency strategy in the coming months. He said he was deaf. .
“However, the government’s success in combating inflation has (saved) Argentina from a bigger crisis, and that’s what they want to continue to prioritize,” he added. “They believe this is a risk worth taking and a risk that can be managed.”
