Argentina holds rates for first time this year

The Argentine central bank board held interest rates at 75% at its October 20 meeting for the first time this year.

The central bank has been pursuing “a process of monetary policy normalisation” since the beginning of 2022, hiking rates in nine consecutive monthly meetings. In total, the Central Bank of Argentina (BCRA) has nearly doubled its headline rate this year, from 38% to 75%.

In its monetary policy press release, the board said it held rates because core inflation rose less month on month than the headline figure in September. Headline consumer price index (CPI) inflation was 6.2% in September, down from 7% in August. Core inflation was 5.5% in September, down from 6.8%.

The Argentine national statistics agency, Indec, reported year-on-year CPI inflation of 83% in September, up from 78.5% in August. Earlier this month, the median respondent in the BCRA’s own market expectations survey projected 100.3% year-on-year inflation by year’s end.

Argentina faces daunting economic challenges. The country’s currency – pegged 1:1 with the US dollar in the 1990s – has fallen to more than 150 to the dollar at official rates. The unofficial rate is nearly twice that.

Fiscal and trade deficits, and the gap between official and unofficial exchange rates, have placed relentless pressure on the BCRA’s reserves. The central bank has had to print money to fund the government’s deficits.

The International Monetary Fund granted Argentina a 30-month loan for 31.9 billion in special drawing rights (then worth approximately $44 billion) in March 2022. This loan is partly a way to roll over a $57 billion credit from a failed IMF programme launched in 2018. Argentina pulled out of that accord in 2020.

The new IMF loan requires Argentina to cease monetary financing and adopt a real positive interest rate. The IMF has also obliged the BCRA to meet certain net international reserves targets each quarter.

The BCRA fell nearly $300 million short at the end of June, but reserves surged in the third quarter after the central bank revived its “soy dollar” initiative. Under this scheme, the BCRA bought foreign exchange from agricultural exporters at a premium above the official rate of 200 pesos to the dollar.

This was sufficient for the IMF to disburse the second tranche of the new loan on October 7, a total of $3.8 billion. However, IMF managing director Kristalina Georgieva commented: “While targeted FX measures can temporarily support the balance of payments, they are not a substitute for sound macroeconomic policy.”

The central bank’s 10-member board sets rates. It includes the governor and nine other members, who serve six-year terms. Eduardo Hecker was appointed to a vacancy on October 19 and will serve in an interim capacity pending his confirmation by the Senate.