Brazil & Southern Cone - October 2008 (ISSN 1741-4431)

Martí­n Redrado, the president of the central bank, has emphasised that Argentina would not follow the example of region's strongest economies, Brazil and Chile, and allow the local currency to depreciate against the dollar in the face of the global financial crisis. What is interesting is that Argentine economic policymaking is still out of step with international policymaking. Argentina is sticking to its heterodox mix of polices: a virtually fixed exchange rate, a hefty fiscal surplus (at least at the operating level), and a fixation about the inflation rate. The signs of tension in the economy are clear. Although the peso exchange rate has remained pretty stable at Arg$3.2US$, this has only been achieved with a tremendous effort. Redrado jacked up interest rates twice in the first 10 days of October. Such rises are complicating life for business and not really preventing a flight from the peso to the dollar. Yields on domestic currency government bonds have touched 35% which is close to the levels they hit before the default in 2001.

Inflation: Almost no-one believes the official consumer price inflation figures. In September, the monthly rate was 0.5%, the same as August. For the first nine months the official rate was 6.1% and the rate for the past 12 months 8.7%. In 2007 the official inflation rate was 8.7%. Most reputable economists reckon that the true inflation rate is between 20% and 25%. The government benefits directly from cooking the figures because around a third of local currency government debt is indexed to the official inflation rate.