September 19, 2014
The headline of last Wednesday’s editorial “Interest rates at the crossroads” was prophetic in its way because almost at the same time the Central Bank started easing off on the “sterilization” to soak up excess money supply with high-yielding bonds — whether as an experiment to see if the recent stability could continue without the monetary straitjacket or whether as a longer-term strategic shift in horror at the recessive impact of high interest rates remains to be seen. If this was a stress test, the results were almost instantaneous — much of the released liquidity found its way to the “blue” dollar, which shot up 20 cents to 10.70 pesos by midweek (even though it hardly moved in the rest of the week). If the government has constantly maintained that parallel exchange markets have always been overrated beyond their extremely marginal dimensions, here was a chance to stand by their convictions — but instead the economic team seemed more inclined to hint darkly at speculative manoeuvres by soy exporters.
Without overrating the “blue,” this blip nevertheless indicates that exchange market calm will be difficult to achieve without the price-tag of high interest rates so that the trade-off between growth and stability continues to be as big and as delicate a question as in Wednesday’s editorial. Financial experts feel that on the whole any peso liquidity released by the Central Bank will head for the dollar rather than stay in the national currency to chase prices — devaluation expectations for a dollar already slipping behind inflation after six weeks of an official exchange rate frozen at eight pesos seems more attractive than simply handing inflation more ammunition. Thus far the main suspicion falls on soy exporters (although the insatiable dollar demand of energy imports is also a factor pushing up the greenback) but once the collective bargaining process is completed and major wage increases come through, it will be interesting to see whether ordinary workers will apply their extra money to the wage-price race or whether they too will join greenback demand.
So the question: “Whither interest rates?’” remains as tantalizing as ever — will the “blue” dollar show the lead toward a devaluation which a productive sector entering into recession would welcome in order to regain competitive advantages, once again benefiting soy exporters, or will the Central Bank conclude that there is no alternative to the full monetarist orthodoxy of tight money if summer’s crisis is not to be repeated?