Argentina's Central Bank just raised its rate by 1,000 basis points. What appears to be a sharp brake is too little too late. And it won't save the peso.
Like a speeding car in a Buster Keaton movie, you can see the wheels of the Argentine economy wobbling. Unofficial exchange rates have been under pressure as traders lose patience with the government's reliance on issuing money. The big question this year has been whether the government can keep things going until after the October elections or whether the country will collapse economically before then.
The exchange rate known as contado con liquidación, a measure of the peso's true value, jumped today. But even 1,000 basis points is unlikely to halt the long-term slide. Inflation is above 104 percent, so the 10 percentage point increase in the benchmark rate, to 91 percent, still leaves the country with one of the lowest real interest rates in emerging markets (only in Turkey, where the president believes rate hikes cause inflation, are they lower). At the same time, a record drought is wreaking havoc on the country's exports of maize, wheat and soybeans.
What Argentina needs is for the government to spend less than its revenues in order to pay down some of its peso debt, rather than constantly increasing it and eventually regaining access to international markets. However, cutting spending does not seem to be politically possible, so it will continue to rely on patches such as price controls and an absurd exchange rate policy to try to curb inflation.
There has been some speculation that Economy Minister Sergio Massa could be the ruling coalition's candidate in this year's elections, but if he cannot curb inflation or stabilise the currency, that seems a tall order. The president, Alberto Fernández, has already ruled himself out.
by Sebastian Boyd, Bloomberg
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