Argentina's central bank makes further emergency rate hike as currency falls

Argentina's central bank makes further emergency rate hike as currency falls

On Thursday, the peso plunged almost 8 per cent even as the central bank hiked the rate by 300 basis points, its second surprise hike in less than a week.

The moves followed a week of dramatic weakening in the peso, which sank 7.83 percent just on Thursday to 23 per US dollar. The central bank has hiked the benchmark rate some 1,275 basis points since April 27.

The Central Bank also ratified an inflation target of 15 percent for 2018, although the International Monetary Fund has projected it will reach 19 percent and private consulting firms see it reaching 20 percent.

"Every time, the government is moving away from the inflation target".

The target had been 3.2 percent of GDP before Dujovne tightened it to 2.7 percent. The perception of political pressure on the bank to grease economic activity by keeping the money tap open had cast doubt on its willingness to raise interest rates.

The country is in the middle of a pro-market economic reform programme under president Mauricio Macri.

The rapid-fire rate hikes appeared to dispel those doubts.

"In Argentina, we expect rates will need to remain higher for longer to tackle the entrenched inflation problem".

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Emerging market assets in general have been under pressure in recent days against a backdrop of a rising dollar and higher global borrowing rates.

Argentina's century bond slipped to 86.03 on the dollar from 86.9 after Thursday's rate announcement.

Macri is attempting to reverse years of protectionism and high levels of government spending.

Although it has since given up some of those gains, analysts said the move suggested the Central Bank had done enough for now to stabilize the peso.

A traumatic history of hyperinflation, financial crises and bank runs in Latin America's third-largest economy has prompted Argentines to try to buy dollars to protect their savings when financial troubles arise, complicating the Central Bank's efforts to prop up the peso.

It said in a statement that it sold $451 million on Thursday after selling about $500 million the day before.

"This crisis looks set to continue unless the government steps in to reassure investors that it will take more aggressive steps to fix Argentina's economic vulnerabilities", said Edward Glossop, Latin America economist at Capital Economics.

"If you think this is something transitory, intervening with reserves makes sense".

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