September 22, 2014
Cap or mishap?
Early days for reaching any conclusions about the caps on interest rates set last week but the issue is important enough to deserve comment. The decision to try this experiment should not be faulted — all due credit to the Central Bank’s almost unilateral decision to double interest rates as a key factor in heading off last summer’s post-devaluation crisis but price trends in particular and the national mood in general have changed so much since then while the economic slowdown has sharpened so considerably that it would seem almost unnatural to leave interest rates as they are. But it will take some time to decide whether the impact of this experiment is more positive or negative — the consumer’s gain is the saver’s loss. Undoubtedly the interest rate caps will help many retailers decide that they can sell a product for, say, five or six installments instead of 10-12 and thus revive their faltering businesses in the process. But lowered interest rates also make fixed-term deposits (now down to little over an annual 20 percent) less attractive and the value of last summer’s doubled rates towards restoring interest in the peso in its losing battle with the dollar should not be underestimated. This — rather than mourning the losses for an excessively profitable banking sector — should be the main worry.
The verdict on the interest rate caps will partly hinge on the decision expected today from the United States Supreme Court as to whether to intervene in Argentina’s tussle with holdout creditors — any solution to that deadlock (even one which loses face) could progress towards unblocking access to global capital markets which could go a long way towards countering credit drying up locally as a result of the lower rates.
Whatever verdict is delivered on the interest rate caps, it should be made according to strictly macro-economic criteria — basically, whether the gain or loss for the consumer is greater than the benefit or harm for the saver. There are at least two false ways of judging this move. One is to see it in purely political terms as a battle between Economy Minister Axel Kicillof (allied on this occasion with Cabinet Chief Jorge Capitanich) and Central Bank Governor Juan Carlos Fábrega. And another would be to give undue importance to the always overrated dollar markets when considering the impact of lower fixed-term deposit returns. Not only World Cup players should keep their eyes on the ball.