By Marc Jones and Rodrigo Campos
LONDON/NEW YORK- More governments are seeking ways to prevent surging inflation whipping up economic trouble – and even public unrest – without raising interest rates.
But as the examples below show, past attempts to rein in soaring prices without hiking borrowing costs have often ended badly.
ARGENTINA
A lack of trust in economic institutions – and the peso – has plagued Argentina for decades.
Efforts by right- and left-wing governments to rein in galloping inflation have seen price freezes on many products and capital controls.
Argentines often prefer to do business in dollars but limited access to the US currency has created a huge gap between official and black market exchange rates.
The central bank recently raised interest rates to 40 percent from 38 percent. But the “real” rate, taking inflation into account, remains deeply negative.
Goldman Sachs’ Argentina economist Alberto Ramos says headline inflation has averaged 47.2 percent since July 2018, attesting to “significant macro policy dysfunction and the failure of the monetary authority in securing monetary control”.
VENEZUELA
Hard-left governments have tried virtually everything over two decades, from fixing prices in 2007 to offering cut-price dollars – a policy quickly reversed due to frenzied demand.
Venezuela defaulted in 2017 and money-printing to cover the budget deficit caused hyperinflation which reached 65,000 percent in 2018. The IMF sees inflation at 2,000 percent this year.
President Nicholas Maduro eased some price controls in 2019 and lifted a ban on foreign currency transactions. Official and unofficial exchange rates were brought into line but the bolivar plunged 8,000 percent and Venezuela’s debt-to-GDP ratio soared to 500 percent.
Last month Reuters reported the government was paying providers in dollars to help control inflation.
But the Inter-American Development Bank and others have warned that such ‘dollarization’ leaves those unable to obtain dollars with little access to basic goods, including food.
BRAZIL
High inflation in the 1980s became hyperinflation in the 1990s, just as Brazil returned to democracy.
Under then-president Fernando Collor de Mello, prices, wages and 80 percent of private assets were frozen and financial transactions heavily taxed.
Inflation peaked near 3,000 percent in 1990 and though it dropped to 433 percent in 1991 it was back to almost 2,000 percent by 1993.
The ‘Real Plan’ of 1994 brought things under control, establishing a new currency, hiking rates and slashing spending. Since 1997, inflation has been in single digits every year but one.
POLAND
Poland’s “anti-inflation shield 2.0” includes temporary cuts in value-added tax (VAT) on fuel, food and fertilizers to offset annual price growth that could hit double digits for the first time since 2000.
JPMorgan reckons last week’s measures and November’s Shield 1.0 will reduce inflation by 3 percentage points by mid-year, while Poland’s prime minister estimates Shields 1.0 and 2.0 will cost up to 30 billion zloty ($7.53 billion) — nearly 1 percent of GDP.
But “maintaining an optically lower CPI is a lost battle if price pressures prove persistent”, said JPMorgan’s José Cerveira.
CONGO AND ZIMBABWE
Prices in Democratic Republic of Congo rose by a cumulative 6.3 billion percent in first half of the 1990s as budget deficits were financed with rampant money-printing.
Monetary and fiscal policy restraint and a floating exchange rate system brought hyperinflation under control in 2001.
Zimbabwe printed so much money– including a Z$100 trillion banknote — that its inflation rate hit 500 billion percent in 2008, rendering the currency almost worthless.
Price ceilings imposed by the government left sellers unable to make a profit, leading to major shortages.
By late 2008 Zimbabweans were using US dollars for transactions and in 2009 a multicurrency system also including South Africa’s rand was introduced.
