The Argentina government is set to adopt a “flexible” exchange rate on the peso after it will lift capital controls, the timing of which is undetermined.
A flexible exchange rate is a system that determines the value of a currency based on market forces of supply and demand, instead of a central bank or government.
“If there’s no excess supply of pesos, I can liberate controls, even when I don’t have dollars, because I am going toward a flexible exchange rate,” the Argentina President said during his address at the country’s central bank’s annual conference.
Earlier, Milei had said he and his economic team hadn’t made a decision on fixing the exchange rate between the US dollar and peso or to move towards a free floating currency. He has still not set a timeline to remove the capital controls. A lack of foreign reserves, which remain in the net negative territory, has long been an impediment to lifting controls over fear of capital flight.
Argnetina’s monthly inflation reduced to the lowest level since late 2021. Consumer prices in September increased 3.5% from August. Meanwhile, the country’s annual inflation slowed to 209%, as per the government data. Inflation had hovered around 4% since May, Bloomberg reported.
Milei took charge as President in December last year.
In September, he slashed the country’s main import tax from 17.5% to 7.5%, while the gap between the official exchange rate and the parallel rate, which also affects prices, narrowed. Milei said he would get rid of the import tax altogether by the end of the year. He insisted capital controls, and the peso’s 2% monthly depreciation rate, will remain in place, which also help keep a lid on inflation.
Meanwhile, Milei marched on with subsidy cuts. Train fares jumped nearly 40% last month, with the minimum ticket rising from 200 to 280 pesos. Water, gas and electricity prices all picked up by around 4% as the president also reined in long-existing government aid, with gas prices seeing marginal increases, too.
How Milei handles the peso after lifting controls will be critical to managing triple-digit inflation, welcoming foreign investment and forging ahead with a $44 billion debt owed to the International Monetary Fund. Previously, Argentina’s Economy Minister Luis Caputo said the country would return to markets in early 2026, providing something of a time frame to begin lifting capital controls.
Milei’s victory lap is expected to continue, with economists forecasting that annual inflation will drop sharply to 40.9% in the next 12 months, according to a monthly survey conducted by the nation’s central bank. The central bank’s survey posted Oct. 4 shows economists expect annual inflation to fall to 123.6% by the end of 2024.
With inputs from Bloomberg