Argentina Slows Peso Devaluation Amid Falling Inflation and Market Rally
BUENOS AIRES – Argentina’s central bank announced a significant shift in its monetary policy on Tuesday, opting to slow the pace of the peso’s devaluation against the US dollar. This decision comes on the heels of encouraging inflation data for December, showcasing a continued downward trend in price increases, and amidst a burgeoning market rally spurred by President Javier Milei’s pro-market reforms and anticipated fresh funding from the International Monetary Fund (IMF). Starting in February, the controlled devaluation rate, commonly referred to as the crawling peg, will be reduced to 1% per month from the current 2%. The central bank attributed this move to the "consolidation observed in the inflationary trajectory" and expectations of further declines in inflation.
The deceleration of the crawling peg is expected to further bolster the ongoing market rally, which has been fueled by optimism surrounding Milei’s economic policies. Since taking office in December 2023, Milei has implemented a series of austerity measures, significantly cutting public spending. While these measures have contributed to rising poverty rates, they have also had a demonstrable impact on curbing inflation, which had previously spiraled into double-digit territory on a monthly basis.
The central bank’s announcement followed shortly after the release of official inflation figures for December. The data revealed a marginal increase in monthly inflation to 2.7%, in line with analysts’ predictions. However, the annual inflation rate continued its descent, closing out Milei’s first full year in office at 117.8%, down significantly from the April peak near 300%. This positive trend has been touted by government officials as a victory in their fight against runaway inflation.
Despite the encouraging macroeconomic indicators, the impact of persistent inflation continues to be felt by ordinary Argentines. While the overall inflation rate has slowed, the cost of essential goods and services, particularly housing and utilities, continued to rise in December. This has led to financial strain for many households, exemplified by individuals like 77-year-old retiree Juan Carlos Gonzalez who supplements his income with a part-time job to make ends meet. The disconnect between the reported decline in inflation and the lived experiences of many Argentines highlights the challenges remaining in restoring economic stability.
Market analysts greeted the December inflation data with optimism, interpreting the slight uptick in monthly inflation as a seasonal fluctuation rather than a sign of resurgence. They anticipate inflation to continue cooling throughout 2025. This positive outlook, coupled with the central bank’s decision to slow the crawling peg, reinforces the prevailing belief that Argentina is on a path toward disinflation. This perception has further strengthened investor confidence and contributed to the positive market sentiment.
Looking ahead, market participants are anticipating further monetary policy adjustments from the central bank. Traders are betting on an interest rate cut from the current 32%, with some analysts predicting a reduction of around 500 basis points. While the central bank typically convenes on Thursdays, there is speculation that a rate cut could be announced earlier, possibly ahead of a Treasury tender scheduled for Wednesday. Such a move would further stimulate the economy and potentially accelerate the ongoing recovery. The central bank’s decision to slow the crawling peg, along with the declining inflation trend, has engendered confidence in Argentina’s economic future and fuels anticipation for a comprehensive policy response to address the lingering economic challenges facing the nation.
