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Peso weakening accelerates in January but likely to be of transitory
nature
In January, the peso continued the weakening trend observed in December
but at an even faster pace. After having lost 2.4% of its value in the
December 2002, the currency finished last year at 10.40 pesos to the US$.
In January, the rate of nominal devaluation accelerated to 4.7%, as the
peso rapidly lost additional ground to finish at 10.91 to the US$. While
the Central Bank is not legally bound to abstain from interventions in the
foreign exchange market, such a move is highly unlikely, as it requires
the consent from the Finance Minister and the government has repeatedly
stressed that it would not intervene directly. Usually, the current dollar
weakness versus the Euro is quoted as the main reason behind the peso
weakening. However, this argument lacks logic at least from a medium to
long-term economic perspective. Consequently, most observers expect the
current weakness of the peso to subside and see the exchange rate closing
at 10.68 pesos to the US$ by the end of the year.
Inflation drops in January but Central Bank tightens policy in order to
stem effects of weaker peso
In January, consumer prices increased by 0.40%. The rate was below
expectations, which had seen consumer prices increasing at a faster 0.55%
pace in the first month of the year. According to the Central Bank, the
January price hike was the lowest price increase ever registered for this
month since the institution started the calculation of the consumer price
index in 1969. As a result, annual headline inflation dropped from 5.7% in
December to 5.2% in January. Despite the favourable development of
consumer prices, monetary authorities decided to tighten their stance
again. On 7 February, the Bank announced its decision to raise the
so-called short (corto) by 75 million pesos to 625 million pesos. The
short regulates liquidity in the money market and is the central monetary
policy tool of the Central Bank. While the Central Bank provided no
explanation for its decision, it is obvious that the move was motivated by
the current peso weakness and inflationary expectations, which at 4.2%
remain far from the ambitious 3.0% year-end inflation target rate.
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