Argentina’s interest rate hiked to 60 pct to counter currency woes
BUENOS AIRES: Argentina’s Central Bank hiked its benchmark interest rate from 45 to 60 per cent in a dramatic but fruitless bid to shore up the peso, which plunged to a record low against the dollar.
Despite the bank’s extraordinary measure to impose one of the world’s highest benchmark rates, the currency lost a further 13.5 per cent by the close – its biggest daily loss of the year.
The Argentine currency has now lost 53 per cent of its value since the beginning of the year, to trade at 39.87 to the dollar. It was worth around 18 to the dollar at the start of the year.
But the Merval index on the Buenos Aires stock market jumped 5.34 per cent to 26,754.85 points on the back of a 13.5 per cent rise in the share price of Brazilian petroleum giant Petrobras.
The weakening peso made stock prices tempting and drove sales.
Earlier Marcos Pena, President Mauricio Macri’s cabinet chief, was forced to deny the government was facing an economic disaster.
“We are not facing economic failure,” said Pena.
“This is a transformation, not failure. In that transformation there are difficult moments,” he said.
Ratings agency Moody’s said the Central Bank’s move “is a clear signal that economic policy approaches have not been sufficient to contain the financial pressures facing Argentina.”
Crisis gripped the South American giant’s economy over the previous 24 hours.
Macri had on Wednesday unexpectedly requested an acceleration to the International Monetary Fund (IMF) funding of $50 million agreed in June.
The government has already drawn down a first tranche of US$15 billion – some of which has been used to try and prop up the peso.
A statement from the president aimed at calming the markets appeared to have done the opposite after his request – effectively to get early access to the remaining US$35 billion of the loan – sent the peso plummeting almost seven per cent by the close.
Despite explicit support from the IMF for his policies, the peso opened a further four per cent lower on Thursday -- prompting the Central Bank’s intervention.
The bank pledged to keep interest rates unchanged at 60 per cent until at least December.
IMF chief Christine Lagarde said on Wednesday she had agreed to Macri’s request to speed up disbursement of the loan in a bid to shore up Argentina’s battered economy.
In return for IMF support, the government has committed to reducing its budget deficit to 2.7 per cent this year, from 3.9 per cent in 2017, and to 1.3 per cent of GDP next year.
But analysts said the government needs to provide more detail about how it plans to achieve aggressive IMF fiscal targets, if markets are to be assuaged.
On top of that, the government faces a major obstacle in November, when a US$7 billion foreign exchange debt repayment is due.
“This will be a key flashpoint,” said Edward Glossop, Latin American specialist with Capital Economics.
“Regardless of what happens from here, the country’s weak balance sheets mean that Argentine markets will remain extremely vulnerable to swings in investor risk appetite,” added Glossop.
Speaking at the opening of the Council of the Americas business chamber in Buenos Aires, Pena attributed the market volatility to Argentina’s recent history.