President Javier Milei’s administration is beginning to transition from an exclusive emphasis on combating inflation to a more nuanced approach, as growth, employment, and his approval ratings face challenges in gaining momentum. Argentina’s Central Bank permitted the currency to depreciate over the past three months, while the nation’s Treasury is facilitating increased liquidity in the economy. An array of indicators suggests that patience is wearing thin after more than two years of stringent austerity measures. In this context, Milei is adopting a more flexible strategy in his battle against inflation, which is his primary achievement, in an effort to mitigate unfavourable voter views regarding the economy. The quantity of cash in circulation, or the monetary base, experienced an average increase of 5.4 percent in July compared to June, exceeding twice the rate of monthly inflation. That shift was primarily influenced by a reduction in Treasury deposits at the Central Bank, reversing an extended period of monetary base growth that was either below or aligned with price increases, as indicated by official data.
The peso has depreciated by 9.1 percent against the dollar since mid-April, marking the largest decline among emerging markets. That follows a period during which Argentina’s currency lagged behind inflation for a significant portion of Milei’s initial two years in office. Until recently, the libertarian leader’s primary goal has been to minimise inflation thru measures such as spending cuts, currency controls, increased interest rates, and the cessation of money printing. It worked: Annual consumer price gains decelerated to 34 percent after peaking at 289 percent just two years prior. However, Argentines are experiencing job losses, economic growth is decelerating, and Milei’s approval rating remains entrenched at some of the lowest levels of his presidency, with just over a year until the next election. In that context, policy-makers perceive an opportunity to inject additional pesos into the economy to stimulate growth while simultaneously averting a surge in short-term interest rates akin to last year’s situation, which resulted in a liquidity crisis.
“We see that the conditions are in place to move ahead with the remonetization of the economy, because we have indicators showing that households and companies want to hold larger peso balances,” Central Bank Governor Santiago Bausili said last week. In a departure from established practices, Argentina’s Treasury refrained from depositing additional earnings from a local debt auction into the Central Bank last week. Instead, officials allocated the 3.8 trillion pesos among commercial banks to mitigate a surge in short-term interest rates. “Ongoing softness in growth and contained inflation pressures provide scope for the government’s economic team to continue balancing disinflation objectives with other policy priorities like growth and external resilience, as it’s been doing for the past few months,” said Jimena Zuniga. Economists perceive the strategy as a means to inject liquidity into a stagnant economy characterised by a contraction in lending and subdued consumer spending, particularly as wage growth lags behind inflation. These developments stand in stark contrast to Bausili’s assertion that Argentines desire an increase in pesos. Some analysts caution that an influx of money could potentially exacerbate inflation or lead Argentines to exchange any additional pesos for dollars in anticipation of the 2027 election.
“I’m worried that this move isn’t justified by stronger money demand,” said Juan Manuel Pazos. “My gut tells me they are loosening monetary policy at a time when seasonality in the official FX market is becoming less favorable and we are getting closer to the start of the electoral cycle.” Even some of Milei’s staunchest supporters caution that he requires a more balanced approach as he enters the election cycle, extending beyond merely looser monetary policy. Argentina’s gross domestic product is expected to have contracted in the second quarter, as indicated by the Central Bank’s most recent survey of market analysts, which reflected a significant downward revision. The economy has experienced a reduction of 28,000 private-sector employers, and various polls conducted in July indicated a decrease in Milei’s approval rating. Economist Ricardo Arriazu has long supported the libertarian perspective but cautioned in late July that increasing foreign trade in Argentina could lead to “pockets of unemployment and poverty.” He contended that the government ought to identify specific sectors and workers who may require assistance during this transition.
Other business leaders, including Martín Rappallini, head of the Argentine Industrial Union, and Roberto Méndez, chief executive of tire retailer Neumen, have advocated for tax incentives, subsidised credit, and even certain protections from imports to bolster industry and stimulate lending. Milei and his ministers frequently contend that workers displaced from Argentina’s less competitive industries, such as manufacturing, will transition into more prosperous sectors like energy, agriculture, and mining. Arriazu remains sceptical about the purported seamlessness. He views Greater Buenos Aires – the region with the highest voter population – as the most probable victim of Milei’s trade policies. “In similar experiences, people don’t relocate – or they take a long time to do so,” Arriazu said. “We need to think about how to address the problem.”
