Argentina Moves Again to Bolster the World's Weakest Currency
Argentina Moves Again to Bolster the World's Weakest Currency
(Bloomberg) --
Argentina’s central bank said it won’t allow its key interest rate to drop below 62.5 percent in April, buttressing its campaign to protect the peso.
The commitment comes on top of the central bank’s pledge to freeze the amount of money in circulation until year-end to cool inflation, part of a record $56 billion credit agreement with the International Monetary Fund. The peso gained 1.5 percent Monday to close at 42.71 per dollar, tracking gains in other emerging markets.
The latest step comes after a renewed slump in the peso pushed it to a record low on March 27, threatening to exacerbate an inflation rate that hit 51 percent in February. Price increases have remained stubbornly high after the bank eased policy this year, allowing the key rate, known as Leliq, to fall below 60 percent throughout January and February. The rate now stands at 68.2 percent, the highest in the world.
"Perseverance in the strict control of the evolution of the monetary base will lead to a reduction in inflation in upcoming months," the bank said in a statement after a meeting of its monetary policy committee.
All the same, the central bank expects inflation to remain elevated in March and April, based on high-frequency data it monitors.
Monday’s announcement is the latest twist in the past year for the bank, which has had three presidents and a complete policy overhaul on top of the IMF bailout. It pulled out emergency measures last year to handle Argentina’s currency crisis and recession. The peso lost more than half its value against the dollar and the economy fell into recession as investor concern about the nation’s deficits helped spark the peso’s plunge.
The government and IMF have long forecast that the economy will start to rebound in the second quarter of this year, backed by Argentina’s soy harvest and exports. Some analysts say a rebound can’t take place with rates and inflation this high. Economic activity barely rose in January compared with December, and fell 5.7 percent from a year ago, according to data published last week.
Fighting inflation while implementing austerity measures is challenging President Mauricio Macri’s bid for re-election this year. His approval ratings declined to 30 percent in March. Argentines will cast their vote Oct. 27, with a potential runoff vote between the two top candidates set for Nov. 24.
Some investors were confused by the announcement. Central bank President Guido Sandleris has said repeatedly since taking up his post last year that his main tool is freezing or reducing the so-called monetary base. Sandleris says the benchmark rate is "endogenous," controlled by daily auctions for the Leliq notes, not by the bank’s committee. Turning attention back to interest rates didn’t strike some as consistent.
"The announcements create confusion and feed doubts with respect to what is the real monetary policy instrument," said Adrian Yarde Buller, head of research at brokerage firm Grupo SBS in Buenos Aires.
Measures the bank took last month included:
- Targeting an additional 10 percent reduction in the monetary base
- Extending its target for zero growth in the monetary base until December
- Adjusting its currency band 1.75 percent a month, compared with 2 percent
- Reducing the amount of dollars the central bank can buy if the peso falls below the currency band floor to $50 million a day from $75 million
- Expanding the limit Leliq banks can hold
--With assistance from Alec D.B. McCabe.
To contact the reporters on this story: Patrick Gillespie in Buenos Aires at pgillespie29@bloomberg.net;Ignacio Olivera Doll in Buenos Aires at ioliveradoll@bloomberg.net
To contact the editors responsible for this story: Philip Sanders at psanders@bloomberg.net, Carolina Millan
©2019 Bloomberg L.P.