Argentine Peso Strengthens After Government Moved to Calm Nerves

(Bloomberg) -- The Argentine peso gained Wednesday as the government and the central bank rolled out a raft of measures to control inflation after prices rose more than expected in March for the third consecutive month.

The peso climbed as much as 2.3 percent Wednesday before paring back gains to finish the day up 1.1 percent at 41.9 per dollar. Some investors saw the announcements as boosting President Mauricio Macri’s chances of re-election this year. Still, the yields on Argentine bonds due 2028 rose 13 basis points to 10.6 percent.

Central Bank President Guido Sandleris said Tuesday that the bank would hold its currency band at current levels until the end of the year, halting a policy of gradual depreciation and potentially signaling tighter monetary policy. The government followed up the next day by saying companies had agreed to freeze prices on 60 food items and utility bills. While some analysts said the measures smacked of desperation and panic, the market as a whole gave the peso the benefit of the doubt amid low trading volume.

“It’s an inflation rate that’s too high,” Sandleris said Tuesday. “I think analysts and investors understand very well that the process of reducing inflation isn’t linear and it takes time."

The inflation rate rose to almost 55 percent in March, with consumer prices rising 4.7 percent in the month, exceeding all of the forecasts in a Bloomberg survey of analysts. The pick-up in price growth came after the central bank tightened monetary policy twice in the past four weeks.

Desperate Measures

"These measures all show a government increasingly desperate and concerned over its electoral prospects and with no clear plan to reverse this,” Eurasia Group’s Daniel Kerner and Ana Abad said in a report.

Even Sandleris seemed skeptical over the potential use of price controls.

The government "doesn’t believe that freezing prices by decree, by law, will resolve the problem of inflation," he said the day before the freeze was announced. "Historically, price freezes have ended badly."

The central bank is concentrating on the exchange rate to limit price growth. Policy makers will now aim to keep the peso trading between 39 and 51 pesos to the dollar until year-end and won’t buy dollars if it strengthens outside of the band as it had previously.

Earlier in April, Sandleris said the bank would maintain its benchmark interest rate at or above 62.5 percent until the end of the month to cool inflation. It was 66 percent on Tuesday, the highest in the world.

Food Prices

The government froze prices on products from sugar to milk for at least the next six months and halted price hikes on gas, electricity and public transportation. Officials also brokered an agreement with mobile phone operators not to boost prices for five months. On top of that, it plans to provide more loans and supermarket discounts to pensioners.

It’s the government’s latest effort to show Argentines it’s doing all it can to help them through the second recession of Macri’s presidency. To comply with the International Monetary Fund accord, Macri had been cutting subsidies for utilities and transport, causing prices to rise significantly. It’s also triggered another decline in Macri’s approval rating. He faces re-election Oct. 27.

What Bloomberg’s Economists Say

“With observed and expected inflation both rising, the BCRA is left in an uncomfortable situation. In our view, there are not many options left for the monetary authority, which has already announced even stricter targets for monetary base last month.”
--Adriana Dupita, economist
Click here to view the piece.

Here’s what analysts are saying about the data:

• Alejandro Cuadrado, senior currency strategist at BBVA
  • Central bank measures are positive for the currency in the medium term, but in the short term the peso will continue to be driven by other forces
  • Inflation damages Macri’s re-election bid
  • “Pressure is on for the authorities to still try to tame the weakening trend so as not to feed further inflation”
  • “The new inflation highs put USDARS on an upward, longer-term trend”
• Alberto Ramos at Goldman Sachs
  • Argentine March inflation data show price pressures remain highly generalized and is “very negative and worrisome”
  • Says only one of the 12 main CPI groups had inflation below 3% in March, showing inflationary pressures are widespread
  • Still expects inflation to moderate, but says it will likely peak at 58% in May before easing to 40% by the end of the year

--With assistance from Aline Oyamada and Ignacio Olivera Doll.

To contact the reporter on this story: Patrick Gillespie in Buenos Aires at pgillespie29@bloomberg.net

To contact the editors responsible for this story: Carolina Millan at cmillanronch@bloomberg.net, Robert Jameson, Philip Sanders

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