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Dollar, inflation and interest rates: the market’s view, tied to politics

Dollar, inflation and interest rates: the market’s view, tied to politics

Analysts consulted by the Reuters news agency gave their opinion on the future of the Argentine economy, after Congress approved the so-called Base Law in Deputies and now the Senate is preparing to deal with it.

Expectations of a decrease in high inflation that the country suffers allowed the Central Bank (BCRA) reduce the reference rate to 50% annually, being the second reduction in May and compared to the 133% in force in December under the previous administration.

The libertarian Javier Milei He came to the presidency in December with the promise of deregulating the economy, defeating inflation and channeling public accounts with a sharp cut in spending, when seeking to get out of a harsh exchange control (stock) and level the BCRA accounts in the midst of an increase in poverty and indigence.

Milei is in Los Angeles, United States, with the Chief of Staff, Nicolás Posse, and the Minister of Economy, Luis Caputo, to attend the annual conference of the Milken Institute.

In this framework, the General Confederation of Labor (CGT) called a general strike against the adjustment promoted by the ruling party. The strike would be the second mobilization of the CGT since Milei assumed the presidency.

“The new rate reduction ordered by the Government follows the same logic as previous times: liquefy remunerated liabilities of the BCRA, and reduce future issuance due to this variable,” said economist Roberto Geretto.

“We believe that the limit to a new decline is not established by the gap, since the blend dollar ensures certain containment, but rather that a low differential between the rate and devaluation discourages the liquidation of exports,” he added.

“I think part of the intention of this latest rate cut is for the agricultural dollar to wake up, because I think the Government is seeing that it is lacking tools so that the countryside ends up liquidating all the dollars,” said Sebastián Menescaldi of the EcoGo Consulting.

“The countryside is not happy with this price (of the dollar and) it may hold back,” he estimated and added that “(with) these measures you somewhat awaken the financial dollars, due to this rule in which the countryside can liquidate exports in 80 % in the official market and 20% in the financial market, there it would benefit a little and the number could improve.”

“The underlying issue in the local economy is the need to achieve greater productivity and balance in public accounts,” said VatNet Financial Research.

“So far the new administration can show partial improvements of limited scope. But the political will or possibility of advancing public spending reductions of billions of dollars and modifying judicial and union limitations on labor relations is in doubt,” he added.

“With the start of the thick harvest, which was somewhat delayed by the rains, payments have already begun to normalize but still very gradually. The expectation is that the crawling peg will remain at 2% during May, and possibly also in June, seeking to consolidate the deceleration of inflation,” estimated Adcap Grupo Financiero.

“Investors are attentive to the political negotiations on the way to the Senate in search of achieving approval of the Bases Law and the fiscal package, since it is evaluated as crucial to give sustainability to the strong improvement in public accounts given that it has been acting as a key anchor to improve investor confidence,” said Gustavo Ber of Estudio Ber.

“With lower inflation and interest rates, factors that make credit more expensive in Argentina will be visible, in many cases unrelated to the financial sector. Among them, the provincial and municipal taxes that tax financial activity and, therefore, affect active interest rates, making credit more expensive for the private sector,” said a report by the Mediterranean Foundation.

“The approval in the Chamber of Deputies of the fiscal package (and the pension reform) suggests that the fiscal adjustment that is being carried out will be able to change its composition and depend less and less on highly distorting taxes linked to foreign trade and more of progressive taxes such as Profits”, considered the clearing and settlement agent Neix.

“This would mean that the search for a fiscal surplus would be more comfortable in the coming months and therefore the absorption of pesos would be maintained. If this were the case, the financing needs would be increasingly smaller, so there would be no need to validate high rates.” , he explained.

The Argentine Confederation of Medium Enterprises (CAME) said that ‘SMEs’ retail sales fell 7.3% year-on-year in April, at constant prices, and accumulated a drop of 18.4% in the first four months of the year. In the seasonally adjusted month-on-month comparison, they rose 1.6%, he noted. (Reporting by Walter Bianchi; Editing by)

Source: Ambito

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