Argentina hikes interest rate to 60 percent; peso plunges

Gladys Abbott
September 2, 2018

Argentina's Central Bank has increased its benchmark interest rate to 60 percent in efforts to halt a sharp slide in the value of the peso.

President Mauricio Macri asked for an early release of the loan worth $50 billion from the International Monetary Fund. IMF is concerned that the financial crisis in Argentina might cause failure to meet debt obligations in 2019.

The more than 7% fall in the Peso was its biggest one-day decline since the currency was allowed to float in 2015, prompting central bank interventions and investor concern that the third-largest Latin American economy may not meet its debt obligations.It closed at a record low of 34.10 Pesos per US dollar and is down more than 45.3% against the greenback this year, prompting massive central bank interventions. The peso is down 40 percent this year against the dollar - the worst-performing currency in emerging markets.

The bank said Thursday's rate hike, from 45% to 60%, was a "response to the foreign exchange rate situation and the risk of greater inflation". Earlier this month, Turkey's currency crisis sent the lira to a record low against the US dollar and sparked concerns about emerging markets investments.

Investors are raising concerns that Buenos Aires could soon default as it struggles to repay heavy government loans.

In this photo a person shows the evolution of the currency exchange on a cell phone, in Buenos Aires on August 30, 2018.

Argentina is in the middle of a pro-market economic reform programme, as Mr Macri seeks to reverse years of protectionism and high government spending under his predecessor, Cristina Fernandez de Kirchner. "The closer you get to next year, that's when these will truly be felt in the pocketbook of Argentines", Osorio said.

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The peso has now fallen by more than 50% against the dollar this year.

The IMF said hours later that it was considering speeding up payments because of the financial meltdown, but that Argentina needed to adopt stronger fiscal and monetary policies.

Analysts and investors said it was the latest in a series of communication blunders to have worsened the market downturn and damage the administration's credibility.

The peso's Thursday decline followed an earlier fall of 7% on Wednesday, culminating in the currency's steepest decline since it floated in 2015.

The IMF's director general is still sticking to Mr. Macri's plan. The government says it expects the country's economy to contract 1 percent in 2018 but grow by at least 1.5 percent next year.

The global lender has admitted that it had a made a string of mistakes that contributed to Argentina's economic implosion.

Macri's government has committed to reducing its budget deficit to 2.7 per cent this year, from 3.9 per cent in 2017, and to 1.3 per cent of GDP next year in return for International Monetary Fund support. "I understand this, and I want you to know I am making all decisions necessary to protect you".

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