Fri | Apr 19, 2019

Argentina hikes interest rate to 60%

Published:Friday | August 31, 2018 | 12:00 AM
President of Argentina, Mauricio Macri.

Argentina's Central Bank on Thursday increased its benchmark interest rate to 60 per cent - the world's highest - in an effort to halt a sharp slide in the value of the peso, which plunged to a record low.

The peso fell more than 15 per cent against the dollar on Thursday, trading at 40.5 per greenback, after slipping about seven per cent the day before.

The central bank said in a statement that it was hiking its benchmark interest rate by 15 percentage points to 60 per cent in response to the currency problems and the risk of greater impact on local inflation, which is already running at about 30 per cent a year.

The tumult in the exchange market came a day after President Mauricio Macri said he was asking for an early release of some IMF funds under a US$50-billion backup financing arrangement approved earlier.

Some experts said the announcement, combined with the interest rate hike, had the unintended effect of fuelling the crisis of confidence.

"I'm finding it difficult to understand why, after yesterday's announcement about front-loading more of the IMF funding, the government thought the hike was warranted. Hyperactivity starts to look like desperation," said Monica de Bolle, senior fellow at the Peterson Institute for International Economics.

Macri has struggled to calm markets and bring confidence to Argentines, who continue to lose purchasing power. Many are frustrated with layoffs, higher utility rates and a rise in poverty levels.

Many also have bad memories of the IMF and blame its free-market economic policies for contributing to the country's worst crisis in 2001-2002, when one of every five Argentines went unemployed and millions fell into poverty.

Macri, a pro-business conservative who came into office in 2015, had promised to trim Argentina's fiscal deficit, reduce poverty and curb inflation. He cut red tape and tried to reduce the government's budget deficit by ordering layoffs and cutting utility subsidies, but it triggered labour unrest.

Then in December, officials announced a rise in the inflation target, which caused investors to begin doubting Macri's commitment to taming price rises.

"The government will need to shuffle its cabinet and strike deals with provincial governors for next year's budget," said Argentine economist Marcos Buscaglia.

"In the short term, the government just needs to stop this crisis."

- AP