Argentina’s central bank failing in controlling inflation rate even after raising interest rate to 97%

23 May 2023 , 03:03 PM

Central banks around the world are struggling to control inflation through raising of interest rates. But the central bank of Argentina stands out even among them. Last week it raised the benchmark interest rate by another 6% to 97%. It is doing this in its effort to bring down inflation rate from around 100% level. 

Argentina has traditionally suffered from periods of high inflation. But the current inflation rate of 100% is highest in more than 30 years, that the country has seen. The current increase in inflation rate started during Covid lockdowns of 2021. Supply chain disruptions caused by the lockdowns and excessive money printing by the government, to finance its fiscal deficit, resulted in sharp increase in prices. The government responded by imposing price controls on more than 1400 items of daily use. These included items such as cheese and cheese spread. These price controls worsened the inflationary situation. Price controls imposed by governments tend to increase inflation rate by disrupting the market mechanism and shifting trade to black markets. Producers cut down supply of goods and services when government imposes its prices on them.

Since then the central bank of the country has been raising interest rates, but without much success in controlling inflation rate. This high level of interest rate is hurting economic growth in the country severely. Poverty rate has increased to 40% of the population. 

It is a well-established economic fact that inflation caused by supply chain factors cannot be controlled by raising interest rates. It is only when inflation is rising because of sharp increase in demand, due to overheating of the economy, that increase in interest rates are effective in controlling inflation rate. That is why the central bank of Argentina, like other central banks, is not finding success in controlling inflation.