Argentina pushes interest rates to 40% to defend the peso

Argentina’s central bank raised the country’s interest rates to 40% on Friday, the third hefty increase in eight days in a continuing attempt to defend the slumping peso and put a lid on soaraway inflation.

On Thursday the bank lifted borrowing costs from 30.25% to 33.25%, having already raised them from 27.25% on 27 April.

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The peso has suffered with foreign investors moving their money from emerging market currencies into the dollar to benefit from the recent rate rises by the US Federal Reserve. However, in recent days nervous Argentinians have also been cashing in their pesos for dollars.

Argentina has come under pressure because of its slow economic growth along with one of the world’s highest inflation rates, which is currently running at an annualised 25.4%.

The country is in the middle of a pro-market economic reform programme under its president, Mauricio Macri, and after the latest rate rise the Treasury minister, Nicolás Dujovne, stood by the government’s plan to cut inflation to 15% this year.

The central bank said it would continue to use “all the tools at its disposal” to achieve that target.

Thursday’s rate rise did little to support the peso, which lost 7.83% to 23 pesos to the dollar. But Friday’s increase resulted in the currency recovering some ground to 21.7 pesos.

Even so, the peso is the worst performing emerging market currency this year, having lost about 19% of its value since the start of January.

Dujovne also said on Friday that the government would cut its deficit target from 3.2% to 2.7% of GDP, meaning it would need to borrow £3bn less this year.

Edward Glossop, the Latin America economist at Capital Economics, said: “Risks to the peso have been brewing for a while – large twin budget and current account deficits, a heavy dollar debt burden, entrenched high inflation and an overvalued currency.

“The real surprise is how quickly and suddenly things seem to be escalating.”