More governments are looking for ways to stop inflation from causing economic trouble and even public unrest, without raising interest rates.
As the examples below illustrate, past attempts at reining in rising prices without increasing borrowing costs have often failed.
Turkey has spent years reducing rates, only to raise them again when the lira crashes, infusing inflation.
While it has tried to implement FX restrictions, President Tayyip Erdogan is offering to compensate lira-savers from the public purse in case of currency losses exceeding bank account interest rates.
This could be costly and put at risk a major draw for foreign investors – Turkey’s relatively low government debt.
Gilles Moec, chief economist at AXA, stated that “What the Turks are trying is honest – I have never seen anything similar before.”
Argentina has been plagued by distrust in its economic institutions and the peso for decades.
Price freezes and capital controls have been implemented in response to both right- and left-leaning governments’ attempts to curb the inflation spiral.
Argentines prefer to do business with dollars, but limited access to U.S. currency has created a large gap between the official and black market exchange rates.
The central bank raised interest rates by 40% from 38% to reach 40%. However, the “real” interest rate, which takes inflation into consideration, is still very negative.
Alberto Ramos, Goldman Sachs’ Argentina economist, says that headline inflation has averaged 47.2% over the past seven months. This is a result of “significant macro policy dysfunction” and “the failure of the monetary authorities in securing monetary controls.”
Over the past two decades, hard-left governments tried almost everything. From fixing prices in 2007 and offering cut-price dollars. This policy was quickly reversed by frenzied consumer demand.
Venezuela defaulted in 2017, and money printing to pay the deficit caused hyperinflation, which reached 65,000% by 2018. According to the IMF, inflation is expected to be around 2,000% in 2018.
President Nicholas Maduro relaxed some price controls and lifted a ban against foreign currency transactions in 2019. Official and unofficial exchange rates were brought in line, but the bolivar plummeted 8,000% and Venezuela’s debt to GDP ratio soared up to 500%.
Reuters reported last month that the government was paying providers dollars to control inflation.
However, the Inter-American Development Bank and other organizations have warned that this ‘dollarization’ leaves those who are unable to get dollars with limited access to basic goods such as food.
Inflation was high in the 1980s and then became hyperinflation during the 1990s, just like Brazil returned to democracy.
Fernando Collor de Mello was the then-president. Prices, wages, and 80% of private property were frozen. Financial transactions were heavily taxed.
Inflation reached a peak of close to 3,000% in 1990. It dropped to 433% in 1991, but it returned to nearly 2,000% in 1993.
The 1994 ‘Real Plan’ brought things under control. It established a new currency, raised rates, and cut spending. Since 1997, inflation has been below 1% every year.
Poland’s “anti inflation shield 2.0” temporarily reduces value-added taxes (VAT) on fuel, food, and fertilisers to offset an annual price rise that could reach double digits for first time since 2000.
JPMorgan estimates that last week’s measures, along with November’s Shield 1.0, will reduce inflation by 3 percent by mid-year. Meanwhile, the prime minister of Poland has estimated that Shields 1.0 or 2.0 will cost 30 billion zloty ($7.53 trillion) — almost 1% of GDP.
Jose Cerveira, JPMorgan’s chief economist, said that maintaining an optically lower CPI can be a losing battle if price pressures persist.
CONGO AND ZIMBABWE
Prices in Democratic Republic of Congo increased by a cumulative 6.3 million percent in the first half of 1990s, as budget deficits were financed using rampant money printing