Ar­gentina yanks key rate to 40% to re­vive cur­rency

Sunday Times - - Business Regulation -

● 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.

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