A huge interest rate hike has arrested a run on the Argentine peso

By The Economist online…

THE message to markets could not have been clearer. On the morning of May 4th, following a run on the peso, Argentina’s central bank raised interest rates by 6.75 percentage points, its third hike in a week. The interest rate now stands at 40%, up from 27.25% on April 27th.

Across town Nicolás Dujovne, the treasury minister, told reporters that Argentina’s budget deficit, which was 3.9% in 2017, would be brought down to 2.7% this year, rather than the previously stated target of 3.2%. After the announcements the peso strengthened by nearly 5% against the dollar.

The combined measures slammed the brakes on what was looking like the start of an escalating crisis. Argentina’s peso had fallen by a fifth against the dollar since the beginning of the year, making it the worst-performing emerging-market currency. But the measures also harm the prospects of growth—and of Mauricio Macri, the president.

The problems began in January, following the central bank’s decision on December 28th to loosen its inflation target for 2018 from 12% to 15%. The decision was taken at the behest of the government, which was concerned about the impact of high interest rates on economic growth. The bank then eased rates by 0.75 percentage points, causing expectations of inflation to rise. Investors began to question the bank’s independence, and its commitment to reducing inflation.

Their jitters intensified after 10-year US treasury yields rose above 3 per cent in late April. That prompted investors to withdraw money from emerging markets and other risky assets. Argentina was first in line. On top of inflation that has run at 25% over the past 12 months, investors were spooked by the country’s large foreign debt pile and a current-account deficit of 5% of GDP.

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Category: Business and finance, Approved, Business and finance, Finance and economics

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