Micro-prudential measures, inflation and confidence

· The latest data show that confidence is down. Except in the construction sector, all sectorial confidence indices fell in June. This is only normal because any micro-prudential measures, measures that border on being capital controls, are ineffective.

• If the Lira has gained some value in the last week it is because dollars are being pumped into the market, not because households or firms liked the BRSA-induced constraints regarding FX holdings.

• As the Fed continues to tighten there is a possibility that the U.S. economy can enter a recession. The Fed may even have been late in tightening, which means it will have to tighten more and faster.

• Here things are different. BVVA has announced that it will use hyper-inflation accounting, which automatically implies that revaluation of the passive side will mean a reduction in equity capital.

• True banks have made a lot of profit lately, mostly due to CPI-linkers, but if inflation is properly accounted for, their equities may have actually fallen in real terms. So, what matters most: rising nominal profits or falling inflationadjusted capitals?

• If somebody decides to fight inflation, then what will happen to the policy rate? Currently, inflation is let to its momentum with the hope that base effects will suffice to curtail it come Q1 2023.

• Almost all interest rates have been heading north since September 2021 except the policy rate. If the policy rate is adjusted to the trend inflation according to a Taylor Rule, what should it be? 50%? 60%? Wouldn’t that create havoc in financial markets and cause a recession?

• There is a possibility that any such move will be “too little too late”. If we can say that the Fed was late and allowed inflation to jump to 8.5% before stepping in, what should we say about the CBRT when inflation is around 75?

• Recognition of the causes of the problem is a must. Without the correct diagnostic no sound macro framework can be implemented. Without the correct macro framework no micro measure will work.