Argentina has had problems with its national currency for a long time. The central bank is trying to curb inflation, which has already reached almost 80% year-on-year and is rising at its fastest rate in 30 years. Many analysts believe that we could see it reach the 100% mark by the end of the year.
The central bank is fighting inflation with interest rates
Usually, when inflation rises, interest rates also rise. In Argentina, the Leliq base rate was raised by 5.5% to 75%. This is a big jump, with which the bank raised the borrowing cost to the highest level since October 2019.
Overall, this is the ninth rate hike this year and the bank has been accelerating for the last 3 months, with a 23% rate hike in this period. In the current situation, we can expect further gradual increases.
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Adriana Dupita, Latin America Economist for Bloomberg commented this the situation.
“The new rate hike catches up with the rise in current and expected inflation – but may not be enough to tame inflation or boost reserves. The substantial uncertainty on inflation and the persistent risk that the peso may soon see a sharper depreciation undermine the ability of the new rate to convince households to save or investors to have a position in pesos.”
The country needs positive interest rates due to IMF assistance
Besides trying to slow inflation, the central bank has another reason for introducing such high-interest rates. This is because having positive interest rates is a condition for the country to receive the $44 billion bailout it is seeking from the International Monetary Fund (IMF).
The country needs this loan primarily to meet its upcoming debt repayment obligations. Argentina does not want to find itself in the same position as Russia, which has recently been unable to pay its foreign debt. However, in the case of Russia, this was due to completely different reasons.
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