Santiago Bausili explained why he is not easing monetary tightening despite the economic downturn

The president of the Central Bank (BCRA), Santiago Bausili, warned about the risks of increasing monetary issuance to stimulate credit and economic activity, considering that a greater injection of pesos would not guarantee an expansion of financing and could provoke an acceleration of inflation. He also anticipated that the Argentine economy will continue generating dollars ahead of the presidential elections in 2027 and assured that the exchange rate regime faces a more favorable scenario than during last year's episodes of volatility.

During a presentation before businessmen at the Córdoba Stock Exchange, the official defended monetary prudence and stated that financial institutions already have available funds to grant loans, so an additional expansion of liquidity would not necessarily translate into a greater supply of credit.

"If we injected more pesos into the system, I am not clear that this would incentivize banks to lend more because they already have that funding available. I do believe we run the risk that people see (in that scenario) and say 'here comes what I already lived, I better get rid of the pesos', **which would decrease the demand for money and increase prices, leading to a temporary activity that is not sustainable over time and resulting in an increase in inflation that will cost me much more to bring down because I lost credibility," Bausili stated.

In this way, the head of the BCRA suggested that an artificially driven economic recovery through greater issuance could be transitory and compromise the disinflation process. In his analysis, the main risk lies in economic agents reducing their holdings of local currency out of fear of a new monetary imbalance, generating additional pressures on prices.

His statements come at a time when the recovery of activity continues to show difficulties, especially in the manufacturing industry, while various business sectors demand better financing conditions, a reduction in production costs, and measures that allow for the recovery of domestic demand.

Bausili anticipated that Argentina will continue accumulating dollars until the elections of 2027.

Another focus of his presentation was related to the exchange rate perspectives ahead of the upcoming presidential elections. In this regard, Bausili identified three differences between the dollarization process recorded during 2025 and the scenario that the Argentine economy could face in 2027.

First, he highlighted the external position of the Central Bank and the amount of pesos in circulation. As he explained, last year the monetary authority faced a high level of negative net reserves, while the market perceived a limited capacity to defend the exchange rate regime.

"Last year we still had a very large level of negative reserves. The BCRA had, at least according to the market perception, a limited firepower to protect the regime and we still had some excess money," he recalled.

Unlike that scenario, he considered that currently there is no starting monetary imbalance that could drive a massive dollarization of portfolios.

"Could it be that the demand for pesos falls? It could be, but as a stock we do not start with a stock imbalance. And, on the contrary, it is an economy that has accumulated many dollars during this period and will continue to accumulate dollars," he stated.

In that line, Bausili assured that Argentina will continue generating foreign currency until the 2027 elections, regardless of the electoral outcome, considering it a structural change in the economy's ability to generate dollars.

The third factor he highlighted was the experience of investors during the episodes of exchange rate volatility in 2025, when bets on a regime change or an inflationary jump did not yield the expected results. "In 2025, the market tested the fragility of the exchange and monetary regime, and for the first time since 1995, the regime won. In all other events where there was exchange rate volatility in Argentina, when the market tested the regime, the market won and the regime had to change," he stated.

For the official, that experience modified the incentives of investors and strengthened the credibility of the monetary scheme. "The BCRA, which was the only defender of the regime last year, demonstrated that with very little ammunition it could defend it. Next year we will have much more ammunition than last year, which makes it a more asymmetric bet," he assured.

What Bausili said about the definitive exit from the exchange rate controls

The president of the Central Bank also referred to the restrictions that still remain in the exchange market and the necessary conditions to move towards greater flexibility.

As he explained, one of the current limitations is linked to the management of companies' dollar positions that participate in the official market. The official attributed this restriction to the particularities of the Argentine bimonetary system, in which both individuals and companies can maintain bank accounts in pesos and foreign currency.

"That restriction exists because we have a bimonetary system, because companies and individuals can have accounts in pesos or dollars. In Brazil, Colombia, or Mexico, there are no dollar accounts. In those countries, it is natural for legal entities, for companies, to manage their working capital in local currency," he explained.

In this context, he pointed out that the possibility of managing liquidity positions in different currencies can amplify dollarization movements and generate greater exchange rate volatility. While he acknowledged that maintaining this restriction implies a cost for the functioning of the economy, he stated that the Government still considers it necessary to preserve this mechanism to limit fluctuations that could affect market stability.

"It seems to me that as long as we have a financial system the size of this financial system, where the channeling of savings is outside, we are much more exposed to unnecessary volatility due to this type of fluctuations in the management of companies' cash," he expressed.

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