By Walter Bianchi
BUENOS AIRES (Reuters) -Argentina’s peso is gaining ground despite being unleashed from years-long currency controls designed to stop it falling, helping to banish fears that Argentina’s recurring nightmare – inflation – will return.
The South American country this month abruptly eased most of the controls in place since 2019 that had pegged the peso and severely restricted access to currency markets for individuals and companies, distorting trade and investment flows.
That triggered a plunge of over 10% in the currency last week, sparking concerns that inflation, which had been slowing under the tough austerity of libertarian president Javier Milei, would speed up again.
However, the government’s doubling-down on plans for a fiscal surplus, pledges not to intervene in the FX market until the peso strengthens, an inflow of dollars from grain exports, as well as tight local monetary conditions have since buoyed the exchange rate.
The peso has recovered to near its level before the controls were lifted, defying market expectations and tempering fears that a weakening would stoke inflation, which has dropped to 56%, year-on-year, from near 300% early in 2024.
Peso futures – traders’ bets on where the currency is headed – have strengthened sharply after the initial falls, even if they still suggest the peso will weaken over the year as a whole.
“We now don’t expect an immediate impact on prices,” said economist Fausto Spotorno from local consultancy OJF, adding that increased competition and a lack of pesos in the market should offset any inflation imported through a weaker currency.
“The market is also saying it doesn’t have any money.”
Reuters consulted six analysts, who estimated that April inflation would be between 3% and 5%, higher than in recent months but below previous forecasts above 5%.
Milei has made inflation-busting a priority and has brought the monthly rate down from a peak of around 25% shortly after he took office in late 2023. However, 2% has proved a tough level to break, and in March inflation even rose to 3.7%.
The government also needs to build up depleted foreign currency reserves as part of a newly sealed $20 billion loan deal with the International Monetary Fund (IMF).
Agustín Etchebarne, from the Libertad y Progreso Foundation in Buenos Aires, said that the government’s tight money supply policy and its focus on a fiscal surplus would help bring inflation down in the months ahead.
“With the very significant (economic) adjustment, a very strong fiscal surplus, and fewer and fewer pesos, inflation will drop in two or three months, and next year inflation will be very low in Argentina,” he said.
(Reporting by Walter Bianchi; Editing by Nicolas Misculin, Adam Jourdan and Kevin Liffey)
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