Argentina hikes interest rate to 40 percent to avoid new meltdown

05.05.2018

Argentina's central bank has performed a series of rapid-fire rate hikes to help stabilize the national currency. The country wants to prevent a repeat of its 2001-2 economic crisis that left its population in poverty.

Following a sudden run on the peso, Argentina's central bank on Friday hiked the country's main interest rate to 40 percent, the third time in a week that the borrowing rate has been increased.

A day earlier, the rate stood at 33.25 percent, while on April 27, it was hiked to 30.25 percent from 27.25 percent.

The peso jumped more than 5 percent against the US dollar following Friday's announcement, having sunk nearly 8 percent the previous day.

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The mega-rate hikes are part of the Argentinian government's bid to support the peso, which has lost a quarter of its value over the past year.

Economic crisis averted for now

The measure was broadly cheered by investors as proof the government is serious about preventing a similar crisis to the one Argentina experienced in the early 2000s, when the economy shrank by 28 percent and the country defaulted on its foreign debt.

One research group, Capital Economics, predicted that the high interest rates would likely remain at emergency levels "for a prolonged period.”

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The markets also welcomed Friday's announcement of a revised deficit target, to 2.7 percent of gross domestic product (GDP) — previously it was 3.2 percent, and a modified inflation target of 15 percent.

Inflation is currently running at 25.4 percent, and most analysts expect the headline figure to remain closer to 20 percent. Investors say, that with one of the world's highest inflation rates, Argentina is particularly vulnerable to investment losses.

Argentina only returned to borrowing on the international bond markets three years ago following the election of center-right President Mauricio Macri, who has rolled back many of the protectionist and populist policies of his predecessor Cristina Fernandez de Kirchner.

Despite those reforms, investors remain concerned that Macri has not done enough to stabilize the economy.

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Not great for Macri

One analyst said the new measures would be a drag on the economy and therefore could hurt Macri's chances if he seeks re-election next year.

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Latin America's third largest economy has a long history of hyperinflation, financial crises and bank runs that have prompted the public to protect their savings by keeping them in US dollars.

The popularity of that tactic further complicates the central bank's efforts to prop up the peso.

The peso, along with other emerging market currencies, has recently been battered by international investors moving back to dollars following a rise in yields for US government bonds.

Argentina's economy grew 2.8 percent last year; this year's target is 3.5 percent.

mm/bw (AFP, AP, Reuters)

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