Argentina changed its inflation target for 2018 to 15 percent, up from the central bank's previous goal of 8-12 percent, Treasury Minister Nicolas Dujovne said on Thursday, raising chances the country's monetary policy could be eased. The government will postpone its goal of lowering inflation to 5 percent by one year, pushing it back to 2020, Dujovne said. Consumer prices rose 21 percent in the first 11 months of 2017, above the central bank target for 12-17 percent inflation for the year.
The shift in next year's inflation target brought it closer to market expectations of 16.6 percent. The change came as President Mauricio Macri's government plans further cuts to utilities and transportation subsidies, which will help cut the primary fiscal deficit to 3.2 percent of gross domestic product (GDP) next year but will contribute to inflation by hiking consumers' fees.
"Up until now, we were targeting inflation of 5 percent in 2019, and that has been moved to 2020, while the 10 percent goal has been moved to 2019," Dujovne told a press conference. "For 2018, which is about to start, the target will be 15 percent." The target hike will allow the central bank to change its approach to monetary policy, central bank Governor Federico Sturzenegger said at the press conference.
The bank has hiked interest rates to 28.75 percent this year to fight inflation, prompting concerns that rising financing costs could stifle growth. "This change of the target allows us to recalibrate that monetary policy, because now it has to be oriented toward achieving the 15 percent target, not 10 percent," Sturzenegger said.
Argentina's Senate on Wednesday approved the government's 2018 budget plan, which foresees economic growth of 3.5 percent. Macri was elected in 2015 with a mandate to free the markets and attract investment. His tax and pension reforms recently passed Congress despite harsh opposition criticism. Macri's cabinet chief Marcos Pena said the government planned to introduce labor reform legislation in February aimed at reducing business costs.
Argentina's peso currency opened down 0.81 percent at 18.595 per US dollar after the inflation target changes were announced. In order to continue fighting inflation, Sturzenegger said the central bank needed to keep reducing transfers to the executive branch to help finance its deficit. Dujovne said the primary fiscal deficit target would fall to 1.2 percent of GDP by 2020, down from 4.2 percent of GDP this year.
The central bank will transfer $7.3 billion to the Treasury in 2018 and $3.3 billion in 2019, Finance Minister Luis Caputo said. He added that total financing needs are $30.1 billion next year and $26.1 billion in 2019.
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