Argentina yanks key rate to 40% to revive currency
● Argentina’s government and central bank jolted the country’s battered currency back to life on Friday with a set of announcements intended to restore confidence in the president’s ability to deliver sustainable growth while cutting inflation.
The central bank sharply raised its monetary policy rate to 40%, sparking a 4.78% jump in the local peso, while the government cut its fiscal deficit target to 2.7% of gross domestic product (GDP).
The moves followed a week of dramatic weakening in the peso, which sank 7.83% just on Thursday to 23 a US dollar. After the announcements on Friday, the currency strengthened to 21.95 to the greenback.
The bank said it would keep using all tools at its disposal in its effort to reach the country’s 15% inflation target for this year. Treasury Minister Nicolas Dujovne told reporters the government stood by the 15% target and supported the central bank’s efforts.
The bank has increased the key rate three times — on April 27, then on Thursday and again on Friday, yanking it up from 27.25%.
Economists and investors have complained about the slow pace of progress in narrowing the primary fiscal deficit, which does not include interest payments on debt.
The target had been 3.2% of GDP before Dujovne tightened it to 2.7%. Speaking about the 0.5 percentage point cut in the deficit target, Dujovne said “. . . part of the cut comes from greater-than-expected resources at our disposal, because tax collection is evolving better”.
The government has adopted policies aimed at spurring economic growth ahead of President Mauricio Macri’s expected 2019 reelection bid. The perception of political pressure on the bank to grease economic activity by keeping the money tap open had cast doubt on its willingness to raise interest rates. The rapid-fire rate hikes appeared to dispel those doubts. But a black cloud continued to hang over Latin America’s No 3 economy in the form of one of the highest inflation rates (25.4%) in the world.