BUENOS AIRES – Argentina’s Central Bank on Friday hiked its benchmark interest rate to 40% to support the peso, the third such hike in just over a week and one day after the currency plunged in value. Following the decision, the peso — which has lost more than 10% of its value in the past month — opened 6% higher against the dollar.
Although it has since given up some of those gains, analysts said the move suggested the Central Bank had done enough for now to stabilize the peso.
The government also said it was lowering its primary fiscal deficit target for 2018 from 3.2% to 2.7%, Treasury Minister Nicolas Dujovne said.
The bank had raised its key rate to 33.25% on Thursday, but that failed to prevent the peso tumbling 7.64% on one of the most tense days for the government of President Mauricio Macri. It was the third such hike in just over a week. The first hike was on April 27, when the Central Bank raised the rate to 30.25% to ease pressure on the national currency.
Like other emerging market currencies, the peso has been buffeted by a rise in US government bond yields encouraging investors to buy US treasury bonds.
Friday’s interest rate hike, “the third emergency hike in a week, finally seems to have brought some support to the currency,” Capital Economics research group said, suggesting that the bank had “probably done enough for now to stem the tide.”
A traumatic history of hyperinflation, financial crises and bank runs in Latin America’s third-largest economy has prompted Argentines to try to buy dollars to protect their savings when financial troubles arise, complicating the Central Bank’s efforts to prop up the peso.
Inflation remains a problem. In the first three months of the year, the cost of living rose 6.7%, according to Indec, the official statistics agency. Dujovne acknowledged that high interest rates could impact on growth.
“We hope that this hike in the base rate will be as short as possible,” he said on Friday.
But Capital Economics said it was likely that interest rates would need to stay at emergency levels “for a prolonged period.”
“In Argentina, we expect rates will need to remain higher for longer to tackle the entrenched inflation problem. And if the central bank loosens policy prematurely, it could risk triggering a re-run of the current crisis.”
Argentina’s economy grew 2.8% in 2017, and the government is aiming for 3.5% this year.
The Central Bank also ratified an inflation target of 15% for 2018, although the IMF has projected it will reach 19% and private consulting firms see it reaching 20%.
“The inflation target is not going to change,” Dujovne said, outlining a longer-term outlook of 10% in 2019, and 5.0% in 2020.
But analysts believe the dollar’s climb against the peso will put pressure on prices, thereby complicating efforts to meet the government’s inflation targets.–MercoPress
