The monetary policy, the inflation and the evolution of the exchange rate are closely related issues that have not only been at the center of the government’s economic discussion, but also have weight in the electoral campaign: with different proposals, the candidates for the presidency of Uruguay They also point to prices, the competitiveness and the dollar.
– It has been very successful. One can always criticize things, but in general terms it is very successful. And the success was in the orthodoxy. 20 years ago we were told that there was inflation targets, But they were “little Chinese dishes,” as the former president of the Central Bank said. Mario Bergara, which was actually looking at inflation, but also looking at the real exchange rate and if it looked like it was appreciating, going out and buying dollars. It was a pseudo flotation And it is a technical requirement to float the currency in order to have inflation rules. This government did that.
Apart from the floating exchange rate, why is the current monetary policy orthodox?
– It is orthodox to a large extent because the Central Bank does not get involved in the exchange marketit only controls the interest rate and from technical criteria. That is, it does what it has to do. It also incorporated monetary aggregates to set inflation targets, which is something that is not done much anymore, and it committed to try to bring inflation to the target of 4.5%. In addition, it lowered the ceiling, it was at 7 and it lowered it to 6%.
To say that monetary policy is expansionary or contractionary, certain technical requirements must be met, which are measured according to the Taylor’s rule or the adaptation that is implemented. This government stuck to what it said it was going to do and ended up having a contractionary monetary policy seriously, which it maintained until the end of last year. In that period of almost two years, which is the standard window in which monetary policy takes effect on the inflation rate, they managed to get the inflation came into range and settled near the target; and the agents became accustomed to it and confident. That’s quite a success and it was done in a couple of years.
You mentioned that you have some things you can criticize, what are they?
– The problem I see is that monetary policy ends with the government. That is the fault of the government and of the country that has not yet learned that monetary policy has to be State policythat the Central Bank continues doing the same thing even if the government changes. That is the big problem that the Uruguay: Nowadays the National Party He is saying that he wants to go to 3% inflation with this policy, but you have the opposition that is against it. So, if he wins, what will happen? Are we going to go back to “Chinese dishes” or are we going to continue on this path that is orthodox? This balance that we have today is very fragile because it depends on the electoral result and the political system.
Can we expect a possible Frente Amplio government to change the course of monetary policy?
– I am not going to blame the opposition because there are sectors within it that criticize, but today they have no references., We don’t know who will be the Minister of Economy, the president of the Central Bank. You have different voices. Those who have been mentioned as candidates, from the moderate left, more inclined to orthodoxy in these things, are criticized. The truth is that it was possible to show that the monetary policy It is efficient to lower the inflationThey lost the argument in the facts. But what we have achieved is very fragile for political reasons. There are those who say that if the opposition wins, they will not dare to let inflation rise, but I do not believe in such things, because it is something that already happened in 2005, why can’t it happen again?
What do you think of Alvaro Delgado’s proposal to bring inflation to 3%? Is it feasible?
– It would be advisable to make an effort to aim more at 3% than at 4.5%. Having an inflation rate of 3% is very reasonable, because it generates many advantages and will help in something that has not yet been achieved, which is de-dollarize the economy. In any case, I suppose it is something that will be sought gradually, the objective must be to try to reach 3% at the end of the 5 years.
The key to seeing if you have to raise interest rates is the credibility, Because if people believe you and start projecting lower inflation, you don’t have to raise rates. Since expectations have dropped, monetary policy is a little tighter, you have to lower the interest rate to avoid being contractionary.
How might the Federal Reserve’s rate cuts affect the United States?
– The rate cut in USA, What it allows you to do, to a certain extent, is to be able to lower interest rates without being expansive. Also, if there is any effect on the exchange rate, if the dollar weakens around the world, that helps inflation to be a little lower here. Now monetary policy is in a neutral-expansive instancebecause it has a bias; then, perhaps with the same rate level this tendency to expansiveness is erased by itself, and if the Fed It goes down a lot, it could even be lowered here without having negative effects on inflation.
The rate cut is also good in terms of indebtedness, and the weakness of the dollar means that even the international prices in dollars, as of the commodities, go up. For the exporter it would be the same: the dollar goes down but prices go up.
Could this scenario of interest rate changes have an impact on the exchange rate and, consequently, on the claims of the exporting sectors?
– He strengthening of the exchange rate It does not depend only on the interest rate, but on other factors such as income. foreign direct investment (FDI)There are fewer dollars on the exchange market this year, even though exports are increasing, which is pushing the exchange rate up but not implying a significant increase in inflation. Those who say that it was the contractionary rate that was causing the dollar to fall, what do they say now? Because the dollar has been growing since the end of last year. One of the reasons may be the fall in FDI.
The recovery of exports is symptomatic of the fact that exchange rate misalignments may not be well estimated because there are variables that are not incorporated. If the economy is growing, if the employmentreal wages and exports are increasing, are signs that if there is exchange rate lag, It’s minimal. There’s a lot of chatter here, lobby: Obviously, the exporter benefits from a higher dollar, but monetary policy has to balance everything. Higher inflation doesn’t matter to an exporter because he lives off dollars. So, what you’re really asking for is for real wages to be lower.
Source: Ambito
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