Ar­gentina raises in­ter­est rates to 40%

The Malta Business Weekly - - FRONT PAGE -

Ar­gentina's cen­tral bank has raised in­ter­est rates for the third time in eight days as the coun­try's cur­rency, the peso, con­tin­ues to fall sharply.

On Fri­day, the bank hiked rates to 40% from 33.25%, a day af­ter they were raised from 30.25%. A week ago, they were raised from 27.25%.

The rises are aimed at sup­port­ing the peso, which has lost a quar­ter of its value over the past year.

An­a­lysts say the cri­sis is es­ca­lat­ing and looks set to con­tinue.

Ar­gentina is in the mid­dle of a pro-mar­ket eco­nomic re­form pro­gramme un­der Pres­i­dent Mauri­cio Macri, who is seek­ing to re­verse years of pro­tec­tion­ism and high gov­ern­ment spend­ing un­der his pre­de­ces­sor, Cristina Fer­nan­dez de Kirch­ner.

In­fla­tion, a peren­nial prob­lem in Ar­gentina, was at 25% in 2017, the highest rate in Latin Amer­ica ex­cept for Venezuela.

This year, the cen­tral bank has set an in­fla­tion tar­get of 15% and has said it will con­tinue to act to en­force it.

De­spite the twin rate rises, the peso, which was fixed by law at par­ity with the US dol­lar be­fore Ar­gentina's eco­nomic melt­down in 2001-02, is now trad­ing at about 22 to the dol­lar.

"This cri­sis looks set to con­tinue un­less the gov­ern­ment steps in to re­as­sure in­vestors that it will take more ag­gres­sive steps to fix Ar­gentina's eco­nomic vul­ner­a­bil­i­ties," said Ed­ward Glos­sop, Latin Amer­ica econ­o­mist at Cap­i­tal Eco­nom­ics.

"Risks to the peso have been brew­ing for a while - large twin bud­get and cur­rent ac­count deficits, a heavy dol­lar debt bur­den, en­trenched high in­fla­tion and an over­val­ued cur­rency.

"The real sur­prise is how quickly and sud­denly things seem to be es­ca­lat­ing."

Mr Glos­sop said "a size­able fis­cal tight­en­ing" was planned for 2018, but it might now need to be larger and prompter.

"Un­less or un­til that hap­pens, the peso is likely to re­main un­der pres­sure, and there re­mains a real risk of a messy eco­nomic ad­just­ment."

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