martin redrado : a convincing strategy article by mr martin redrado, governor of the central bank of argentina, published in la nacion newspaper on 18 may 2008. * * * in argentina we have overcome a week of financial turmoil. however, those focusing on the ghosts of our troubled history are looking at our country through the rear - view mirror. there is currently no relationship, not even remote, to the conditions that led to the critical events of the past. the central bank has proven that it is in a position to play for the first time in decades its fundamental role : ensuring monetary and financial stability to all argentineans. our strategy in the foreign exchange market is the most eloquent proof of the robustness of our policies. this resilience of our system is not by chance but causal, since it derives from the existence of multiple preventive mechanisms built throughout recent years so as not to jeopardize stability even in situations like the current one. preventing the use of reserves in times of dollar demand by the public would be as absurd as not using an umbrella when it rains. in this case, the stock of foreign reserves would not be a “ cushion ” to buffer financial ups and downs but a “ bedrock ” with no absorption capacity. the strengths of our monetary and financial system are evident. foreign reserves reached a record - high level for argentina : they currently account for almost 100 % of demand deposits plus cash held by the public ( 45 % in 2001 ). in addition to providing resources to face possible shocks, foreign reserves are also a deterrent : they limit the chances of success of any speculative movement against the peso. likewise, a trade surplus close to 12 billion dollars this year ensures a structural foreign exchange supply that may more than offset any temporary dollar demand, making any nominal devaluation speculation irrelevant. exports dynamics in general, and industrial exports in particular growing at an annual rate of 18 %, show that there is no competitiveness problem today, which was the main cause for past crises. in turn, the current managed floating regime proves to be the right one for an economy in transition like ours. that is, it provides predictability and prevents excessive volatility from affecting economic decisions. what would have happened in these circumstances under a pure floating exchange rate regime? our strategy curbed depreciation expectations and, thus, the potential pressure on prices. moreover, thanks to a sound financial system we are not facing a run on deposits as in the past

to control inflation. i was saying that our monetary policy has to be tight. this is absolutely necessary for various reasons. first, because inflation is still high. second, because we have to combat the forces of inertia of our history. but also because monetary policy should take into account the current context of uncertainty, with the top two world powers having engaged in a trade dispute. the upcoming presidential election in argentina is another source of uncertainty. this endogenous rate reflects the current uncertainty. let me briefly refer to the slight decrease in the interest rate on liquidity bills ( leliqs ) in the past few days. such a drop should not be mistaken as a loosening of monetary policy. it is explained by the drop in inflation and in expected inflation in recent months. 1 / 2 bis central bankers'speeches however, the real interest rate continues and will continue to be positive. the real interest rate has been positive for nearly 9 months, a historical exception that should, actually, be the rule. our tight monetary scheme guarantees this result. in fact, as the leliq rate decreased in the past few days, the real rate slightly increased. this is the endogenous dynamic of the interest rate in the current context of uncertainty. high interest rates carry a cost for many sectors in the short term. however, the alternative carries a higher cost in the current context. this monetary policy protects us from uncertainty, whether domestic or external, and will bring about lasting benefits for society as a whole. 2 / 2 bis central bankers'speeches