(Bloomberg) -- Argentina hiked interest rates for the second time in less than a week to stem the peso’s sharp decline, a tactic that many investors say will again bring only temporary relief.
The central bank raised its key interest rate to 33.25 percent, the central bank’s press office said on Thursday. The peso has fallen more than 5 percent since Friday, when the bank raised borrowing costs by the same amount at a surprise meeting.
"The hike was necessary, but it looks like the market is asking for more," said Joaquin Almeyra, fixed income trader at Bulltick LLC in Miami, pointing to a muted reaction in one-month peso futures after the central bank’s move.
Analysts said on Friday, when the bank unexpectedly raised rates days after it held borrowing costs steady, that the effort might only be the beginning unless the currency was to stabilize. Instead, the peso resumed its decline when markets opened yesterday after a two-day holiday, accumulating a 5 percent decline, while emerging market currencies have fallen 0.5 percent.
The central bank and President Mauricio’s Macri’s government will work together so that inflation will ease toward the 2018 target of 15 percent, Marcos Pena, Macri’s cabinet chief, said in an emailed statement after the rate increase.
The central bank “has the independence, tools and resources to deal with situations of volatility,” he said.
The Argentine peso traded 2.7 percent lower at 21.75 per dollar at 11:50 a.m. in New York after hitting a low of 21.90 per dollar earlier in the day.
The peso has now slumped almost 14 percent this year against the dollar and looks set to fall further to keep pace with consumer prices still stuck far above the official 15 percent target. With annual price increases running at a double-digit pace, the currency will need to depreciate by a similar amount to keep the exchange rate stable in real terms.
The central bank has spent almost 10 percent of its reserves this year to stem the peso’s decline, including $4.3 billion last week. Policy makers reiterated that they will continue to act if their inflation target of 15 percent is threatened. A majority of economists surveyed by the central bank and Bloomberg no longer believe consumer price increases will reach the target.
Concern about the central bank’s management of inflation and the government’s ability to narrow its fiscal deficit is spreading to corporate finance. Telecom Argentina SA, the nation’s largest telecommunications company, postponed a $1 billion bond sale because of the market volatility.
The central bank is seeking to reestablish its credibility after sending mixed signals to investors earlier this year, when policy makers pared back their goals for cutting inflation and lowered borrowing costs in a bid to spur growth.
"Argentina is fragile," Almeyra said. "They should have done this in December, but they didn’t because of political reasons, and now they’ve got a giant problem."
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