Thursday, May 3, 2018

Argentina hikes rate another 300 bps, ready to act again

     Argentina's central bank raised its monetary policy rate by another 3 percentage points to 33.25 percent, less than a week after its last unscheduled rate hike, saying the tightening was aimed at guaranteeing disinflation and that it "is ready to act again if necessary."
      The Central Bank of Argentina (BCRA) has now raised its benchmark rate by a total of 600 basis points since April 27 and said today's rate hike came amidst high international volatility on the foreign exchange market where the drop in the peso has accelerated despite the rate hikes.
      BCRA also increased the distance between the policy rate and the ceiling of its 7-day active pass rate by 500 basis points to 38.25 percent. BCRA uses the operation of passes, the purchase of sale of securities, and auctions of letters and notes, to manage liquidity.
       "The Central Bank will continue using all the tools at its disposal and will conduct its monetary policy to reach its intermediate target of 15% in 2018," the BCRA said.
       Despite the two massive rate hikes in less than a week, the peso fell to 21.97 to the U.S. dollar today, down 6.6 percent since Monday and down 7.9 percent since April 26, before the first rate rise.
       Since the start of this year, the peso has now depreciated 15.4 percent against the dollar and since the start of 2017 it has lost almost 28 percent, despite repeated intervention by BCRA to defend it.
       The two rate hikes follow two rate cuts in January by a total of 150 basis points that came in response to the government's decision in late December to ease the inflation target, a move that was seen as allowing the BCRA to ease its policy and thus  help stimulate economic growth.
       The government of Mauricio Macri, which is facing an election in October 2019, pushed back its goal of lowering back inflation to 5 percent by one year to 2020 and raised the 2018 inflation target to 15 percent from a previous 8-12 percent.
       But instead of decelerating toward the new 15-percent target, Argentina's inflation rate has been rising and hit 25.6 percent in Mach, up from 25.4 percent in February.
       In addition to higher import prices from the fall in the peso, Argentina's inflation rate has been boosted by the government's cut in subsidies on regulated prices, such as energy and transportation, in an effort to narrow the deficit.
       In early April the BCRA said the recent rise in inflation was transitory and once the one-factors dissipated, inflation would continue the downward trend observed in 2016 and in early 2017.
       BCRA has now raised its key rate by a net 450 basis points this year.



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