Argentina’s central bank cuts interest rate to 40% from 50%

Argentina’s central bank cut the interest rate from 50 per cent to 40 per cent as inflation came down to the monthly rate of 8.8 per cent, a wee bit better than the projected 9 per cent from 25 per cent in December.

President Javier Milei, the political novice and television economic pundit who won the presidency late last year, has been taking drastic austerity measures. Many of the salaried people and pensioners are feeling the pinch but they hope that inflation will be tamed.

The annual rate of interest through April stood at 289.4 per cent. The impact on the ground is yet to be felt by people. Shopkeepers and buyers complain that the government says that inflation is down but they are yet to feel it because prices remain high. For the last few years, Argentinian economy has been in turmoil with inflation crossing 300 per cent per annum.

The central bank interest rate had to be increased to unrealistic levels to combat the three-digit inflation levels. Sandra Boluch, 50, a fruit and vegetable seller in Buenos Aires says, “ No matter how much the inflation rate goes down, which is what everyone says, it is not reflected here because, there are items that should have gone down but haven’t.”

She says that the workers’ salaries had to be increased because their rentals had gone up. As prices of plastic bags have gone up, the prices of carrots and apples remain stubbornly high.

Eugenio Mari, chief economist at Libertad and Progreso Foundation, a consultancy, observed, “He (Milei) generated a monetary austerity shock, stopped injecting pesos into the economy, and gave a strong signal of fiscal austerity.” This has hit salaries and economic activity.

But the harsh measure seems to be bringing in the dividend of an improved economy. He says, “But the interesting thing is that now, with the drop in inflation, the door is open for real wages to recover.” The International Monetary Fund (IMF) had said on Monday it would release $800 million loan, which is seen as a vote of confidence in Milei’s austerity measures.

But not everyone thinks that Milei’s measures are working. The perception is that Argentina is entering a painful recession. Even the IMF says the Argentinian economy would shrink 2.8 per cent in 2024. Says Monica de Bolle, senior fellow at the Peterson Institute of International Economics who studies emerging markets, “You’ve had a massive collapse in private spending, which explains why consumption has dropped dramatically and why inflation is also falling.”

It looks a tough battle but there are signs and hopes that inflation will be brought under control though it is likely to take longer than expected. And it is also likely that only someone who is not a professional politician like Javier Milei could have taken the risk of taking the tough decisions on the economy.

People of Argentina seem to have chosen Milei because they felt that here is the man who will make the right moves, however painful they may be in the short term.  The case of the Argentinian economy getting into rough waters is not unusual in the political atmosphere of South America, which veers between populist left-wing leaders and right-wing leaders who try to favour the business class forgetting the majority that is poor.

In Argentina the situation reached a dead-end, when both the rich and the poor were caught in the winds of uncontrolled inflation. There was need for someone who had to calm the inflationary trend. Milei’s economics may not work over a long period, but he is the man of the hour.