BUENOS AIRES: Argentina’s central bank yanked its benchmark interest rate up to a dizzying 60 per cent on Thursday in a bid to control rampant inflation as the country’s currency plummeted 15.8pc to a record low 40.5 pesos per US dollar.
Latin America’s third biggest economy is expected to shrink this year, while already-scarce credit has been choked off by increasingly onerous borrowing costs. The central bank raised the rate from 45pc to combat 12-month inflation running at 31pc through July.
The bank issued a statement saying it called a special meeting of its monetary policy committee, which voted unanimously to hike its key interest rate “in response to the foreign exchange rate situation and the risk of greater inflation.” The moves came a day after the International Monetary Fund (IMF) called for the government to institute stronger monetary and fiscal policies in response to the meltdown of the peso. The currency has lost 53.95pc of its value so far this year, making it the world’s worst performing.
Despite signing a $50 billion standby financing deal with the IMF earlier this year, President Mauricio Macri is struggling to convince markets that he can spur economic growth while cutting fiscal deficits and combating inflation.
“It looks likely that the economy is heading for a hard landing recession over the next 12 months,” said Paul Greer, a portfolio manager at the Fidelity Emerging Market Debt Fund.
Shares of Argentine export companies that get paid in dollars and benefit from a weak peso drove the local Merval stock index 6pc higher. But the average yield spread of Argentine sovereign dollar bonds over safe-haven US Treasuries jumped to levels not seen since January 2015.
More Fiscal Tightening
Macri’s cabinet chief, Marcos Pena, told reporters on Thursday the government would “find ways to hasten the fiscal tightening process.”
Argentina has already agreed with the IMF to cut its fiscal deficit from 3.7pc of gross domestic product last year to 2.7pc in 2018 and 1.3pc in 2019.
Government spending reductions face opposition from Argentines reeling from cuts in public utility subsidies, a move that has pushed home heating, electricity and water bills higher.
The country’s biggest labor group, the CGT, and other unions have called for 24- and 36-hour general strikes in late September to protest Macri’s belt-tightening measures.
The recent slide in the peso was prompted by fears the government may have trouble meeting its 2019 bond obligations.
Argentina has $24.9 billion in peso and foreign currency denominated debt payments next year.
Published in Dawn, August 31st, 2018