Rodrigo Campos and Marc Jones

LONDON/NEW YORK – Governments are looking for ways to stop inflation from causing economic turmoil – or even civil unrest – without increasing interest rates.

However, as shown in the below examples, previous attempts to curb soaring inflation without raising borrowing costs ended poorly.

TURKEY

Turkey has been lowering rates for years, but then raising them again when the currency collapses. Inflation is a constant threat.

Although it’s tried FX restrictions before, this time President Tayyip Erdoan is offering to reimburse lira-savers from the public purse in case of currency losses exceeding bank account interest rates.

This could be costly and expose Turkey’s low level of government debt, which is a major drawcard for foreign investors.

Gilles Moec (AXA chief economist) said, “Whatever the Turks try, honestly – I have never seen anything similar before.” Graphic: Turkey inflation seen hitting 55% by mid-year&nbsp, https://graphics.reuters.com/TURKEY-INFLATION/lgvdwjjwepo/chart.png

ARGENTINA

Argentina has been plagued by distrust in its economic institutions and the peso for many decades.

Price freezes and capital controls have been implemented in response to both right-wing and left-wing government efforts to curb galloping inflation.

Argentines are more comfortable doing business in dollars than they are with the U.S. Currency. However, there is a significant gap between black and official exchange rates.

Recently, the central bank raised interest rates by 40% to 38% from 38%. However, the real rate (which takes inflation into consideration) is still very negative.

Alberto Ramos, Argentina’s economist at Goldman Sachs (NYSE) says that headline inflation has been an average of 47.2% per year since July 2018. This is a sign of “significant macro-policy dysfunction” and the inability to secure monetary control. Graphic: Argentina’s annualized benchmark rate, https://graphics.reuters.com/INFLATION-DEBT/ARGENTINA/dwpkrkllgvm/chart.png

VENEZUELA

Over the past two decades, hard-left governments tried almost everything; from fixing 2007 prices to offering cut price dollars — a policy that was quickly reversed by frenzied consumer demand.

Venezuela defaulted on its 2017 budget and money printing was used to fund the deficit. Hyperinflation reached 65,000% for 2018. IMF estimates inflation to be at 2000% for this year.

In 2019, President Nicholas Maduro lifted the ban on currency transfers and relaxed price controls. Unofficial and official exchange rates were aligned, however the bolivar fell 8,000% and Venezuela’s ratio of debt-to GDP soared up to 500%.

Reuters reports that last month, the government had paid dollars to providers for inflation control.

The Inter-American Development Bank, among others has cautioned that this ‘dollarization’ can leave those who are unable or unwilling to acquire dollars without access to essential goods and food.

Graphic: Venezuela hyperinflation, https://fingfx.thomsonreuters.com/gfx/mkt/movanwrqmpa/Pasted%20image%201642587067092.png BRAZIL

The 1980s saw high inflation, which became hyperinflation by the 1990s. Brazil has since returned to democracy.

Fernando Collor de Mello was the then president. Prices, wages, and 80% private property were all frozen. Financial transactions were heavily taxed.

Inflation reached its peak at close to 3,300% in 1990. However, it fell to 433% by 1991 and was almost back to 2000% in 1993.

1994’s ‘Real Plan” brought everything under control. It created a new currency and raised rates while cutting spending. Every year except 1997 has seen inflation in the single digits.

POLAND

Poland’s anti-inflation shield 2.0 includes temporary reductions in VAT on fuel, food, and fertilisers. This is to offset an annual increase of up to double the rate since 2000.

JPMorgan (NYSE 🙂 believes that last week’s actions and November’s Shield 1.0 will lower inflation by three percentage points by mid-2018. Meanwhile, Poland’s prime Minister estimates that Shields 1.0 or 2.0 could cost as much as 30 billion zloty ($7.53 trillion) — almost 1% of the GDP.

But “maintaining an optically lower CPI is a lost battle if price pressures prove persistent”, said JPMorgan’s José Cerveira.

Graphic: Highest inflation in Poland since 2000, https://fingfx.thomsonreuters.com/gfx/mkt/jnpwejryqpw/Pasted%20image%201642196716841.png CONGO AND ZIMBABWE

The cumulative price rise in Democratic Republic of Congo was 6.3 Billion Percent in the first six months of 1990, as budget deficits were funded with massive money printing.

In 2001, hyperinflation was controlled by fiscal and monetary policy restraints and a floating rate system.

Zimbabwe has printed so many money — including Z$100 Trillion banknote — that its 2008 inflation rate was 500 billion per cent, making the currency nearly worthless.

Sellers were unable to earn a profit due to price caps imposed by government.

Late 2008, Zimbabweans used U.S. dollar for transactions. In 2009, a multicurrency system was also introduced.

The Zimbabwe dollar got a brand new name in 2019, but Harare was made to return the multi-currency setup in COVID-19 in 2020. Inflation rose to 349%, according to IMF reports.

France

During the French Revolution, hyperinflation saw prices rise to a peak of 143% per month. With price caps and the death penalty, the 1793 “Law of the General Maximum,” addressed price gouging with the General Maximum.

It was a major failure according to historians. Traders who were forced to offer lower prices than they actually cost turned to the black markets or kept their goods, leading to severe shortages.

MEXICO

In 1982, Mexico was hit hard by falling oil prices and U.S. rates hikes.

Bank deposits in dollars were changed into pesos by the government and an end to debt payments was declared. At the end of the year, trade had become regulated and capital controls were in place. The banks were then nationalized.

As real per capita GDP declined, the annual inflation reached 100 percent in 1982-83. The inflation rate remained high and reached 150% by 1987.

1994 saw the peso crisis spread to other emerging nations, resulting in a free-float which caused the currency to plummet in value. Mexico had its banks collapse and required a $50 billion bailout from the international community to stay out of default.

Despite a severe recession, hyperinflation and more inflation following it, Mexico maintained investment-grade credit ratings by 2002.

THE 1970’S

After the collapse of the Bretton Woods system for fixed exchange rates in 1971, many countries adopted price control measures. The 1973 oil crisis caused a global surge in inflation.

After pulling out of Bretton Woods the United States instituted a 90 day freeze on wages and prices. It was the first time this had happened since World War Two.

Although it was hailed as a success in politics, the economic collapse brought about currency instability and stagflation. In the 1970s, the dollar fell by three-quarters.

France, which has an inflation rate of 25% or more than the UK’s, also introduced price controls. This unpopular policy was a catalyst for labour strike action that triggered the “Winter of Discontent” 1978-1979.

After interest rate increases and an easing of oil prices, inflation declined in the 1980s.

AXA’s Moec spoke out about wage caps and prices, saying that “History shows it never works.” But it does not stop anyone from trying. Graphic: 1970s inflation spikes, https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnjxdjpq/Pasted%20image%201642614453202.png