ANALYSIS: Why Argentina’s drastic action failed — and what it needs to do next
The central bank has inadvertently stumbled into a series of policy mishaps as it increasingly came under fiscal authorities’ influence, writes Mohamed A El-Erian
Encouraged by President Mauricio Macri’s credentials as an economic reformer, many had hoped Argentina would turn the page on its costly history of economic mismanagement and, as Macri said, become a "normal country." Instead, the nation was back in the spotlight last week as it frantically tried to contain currency turmoil by raising interest rates to an eye-popping level in the context of destabilising capital flows. The turbulence is putting at risk much-needed economic reforms and is having some negative spillover effects on other emerging economies. Why is this happening? Central banks know they face serious policy challenges when they announce a surprise interest rate hike (in Argentina’s case, 300 basis points on May 3) only to see the currency depreciate rather than appreciate as economic textbooks and logic would suggest. That is what happened in Argentina last week. This forced the central bank to take even more dramatic action on May 4 by increasing interest rates by anot...
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
Subscribe now to unlock this article.
Support BusinessLIVE’s award-winning journalism for R129 per month (digital access only).
There’s never been a more important time to support independent journalism in SA. Our subscription packages now offer an ad-free experience for readers.
Cancel anytime.
Questions? Email helpdesk@businesslive.co.za or call 0860 52 52 00. Got a subscription voucher? Redeem it now.