Inflation that is happening in Argentina is of course very worrying, according to the latest data more than 70% of Argentinian people are currently poor, it is time for the country to do big things to immediately deal with inflation, raising interest rates without being followed by economic activity will certainly never be effective.
As of last year, nearly four of every 10 people were poor which means that 39.2% of the population in the second half of 2022 we're poor. If this inflation is not checked more middle-income citizens might go down the poverty line.
Interest rate increase can help if the inflation stays below 20%. Beyond that, the impact of interest rate increase falls drastically. I remember reading a case study on this during my MBA days but can't really locate that material anymore. If the interest rate goes beyond 20%, people usually stop paying EMIs and start defaulting willingly. That puts huge pressure on banks.
The goal for Argentina now to take majority of the money out of circulation to reduce the purchasing power of their citizens to bring down the demand in the market. A drastic step like Demonetization is the only way out it seems. That's the only way to suddenly take out certain denominations from the circulation.
Argentina should also consider the causes of the failure of banks in the US before making monetary policy. Interest rate hikes would reduce spending and encourage contentment among citizens but it will affect business and can give rise to capital flight. Businesses that would have created job opportunities will be starved of the needed support from banks making them close down temporarily or permanently. Some businesses might decide to invest in neighboring countries that have low-interest rates because Argentina might not be conducive. It is very unfortunate how a beautiful and once economically stable nation is struggling to put its economy under control.
