Argentina could raise interest rates to keep US dollar at bay
The Argentine Central Bank (BCRA) is considering raising the interest rate, in accordance with a suggestion from the International Monetary Fund (IMF), we learned in Buenos Aires on Wednesday.
The move would help make Treasury debt securities more attractive and avoid pressure on the US dollar, although it could also slow economic activity and increase the BCRA’s quasi-fiscal deficit, analysts said.
BCRA sources cited by Buenos Aires media admitted that the measure was under consideration although the expected magnitude of the increase was not disclosed.
The base rate currently stands at 38% per year, between 13 and 14 percentage points below inflation, and has remained unchanged since the outbreak of the COVID-19 pandemic in March 2020.
The initiative is expected to increase demand for Argentine pesos and discourage the purchase of foreign currency, especially at a time of year when, for seasonal reasons, there is excess liquidity in the market. But behind this dilemma at the macroeconomic level, the measure could lead to more expensive investment projects and stagnation of economic activity, which the administration of President Alberto Fernández is trying to avoid.
This is why the government lowered the rate from 63% at the end of Mauricio Macri’s presidency to 38% currently.
The IMF issued a statement calling for “adequate monetary policy with positive real interest rates,” among other requirements to agree on a program to renegotiate the $ 45 billion debt. According to the IMF, the rise in rates would make government investments of bonds in pesos more attractive, thus reducing the need for financing through BCRA transfers which lead to higher inflation.
The effective rate (that resulting from the monthly renewal of an investment 30 days after receipt of interest) is just over 44%, which brings the real difference with annual inflation to just 6 percentage points. With this in mind, and according to rumors in financial circles, the rise in the base interest rate does not need to be very strong.
Foreign trade on a conversion scale between Argentine pesos and Russian rubles is also being explored to help keep the exchange rate with the US dollar at bay, as a steep devaluation seems more inevitable every day.