At face value, the Argentine central bank’s (BCRA’s) decision yesterday to switch (and essentially lower) its policy rate seems at odds with the goal of tackling the country’s severe inflation problem. But the move appears to be aimed at shifting the BCRA’s large peso-denominated debt burden – the so-called ‘Leliq bomb’, which is the result of years of financing the government’s deficits – back to the Treasury. If right, that would be a step in the right direction towards making the true extent of the government’s fiscal problem transparent and ceasing central bank monetisation of the budget deficit. But a permanent solution will require substantial fiscal tightening and banning the BCRA outright from financing the Treasury.
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