Argentina’s Central Bank cut its benchmark interest rate by 300 basis points to 29 percent as inflation continues to slow in South America’s second-biggest economy.
The bank’s board said the cut was due to reduced inflation expectations and that the new rate takes effect Friday, according to an emailed statement.
The rate cut comes as the government is set to slow down the currency’s official monthly depreciation rate to one percent from two percent on February 1. The controversial policy change to what’s known locally as the crawling peg, which some say is contributing to an overvalued peso, seeks to further cool inflation.
“This is a sign that the central bank is betting on a continued inflation decline,” said Leonardo Anzalone, economist and director of Buenos Aires-based CEPEC, but added it’s not without risk. “If inflation doesn’t slow down at the expected rate, it could put pressure on the dollar and therefore increase expectations of a devaluation.”
Lowering borrowing costs means the government can continue to have a benchmark rate that is roughly in line with inflation while continuing to shave off its liabilities, the tactic it has employed throughout the past year. The rate also serves as the benchmark rate for Treasury instruments.
It’s the Central Bank’s ninth rate cut since President Javier Milei took office in December 2023, when borrowing costs were 133 percent. Lowering interest rates has become one of the most unorthodox parts of Milei’s strategy to slow inflation. When he first began slashing, Argentina’s interest rate ran nearly 13 percentage points behind inflation, which over time gave way to a more neutral real rate, according to a recent Central Bank report.
Investors expected the monetary authority to cut rates during its weekly directors meeting January 16, just after the Central Bank touted its decision to lower the official currency’s monthly depreciation rate. Instead, it held steady. The announced change in the peso’s slide came just after the statistics agency showed a cooler annual inflation print of 118 percent. The last rate cut took place December 5.
Argentina still maintains a litany of capital and currency controls, making it possible to continue cutting rates while carefully managing the peso’s slide. Milei has promised to lift controls this year, which may force it to provide more attractive rates to stave off a possible currency run. The International Monetary Fund, with which Argentina is negotiating a new loan programme, has long been a proponent of interest rates well above inflation.
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