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ECONOMY | 12-03-2024 09:43

Argentina's Central Bank cuts rates to 80% in surprise move as inflation cools

Central Bank unexpectedly cuts banchmark interest rate as policy-makers forecast cooling of inflation.

Argentina’s Central Bank unexpectedly cut its benchmark interest rate to 80 percent from 100 percent as policymakers see monthly inflation cooling while the peso continues to strengthen against the US dollar in parallel markets. 

Despite annual inflation over 250 percent, the monetary authority cited a range of factors in explaining the cut late Monday night, including its steady rebuilding of reserves.

Argentina’s statistics agency is due to publish February inflation figures on Tuesday. Economists surveyed by Bloomberg expect consumer price gains will come in at 15 percent on the month, continuing to cool from 21 percent in January and 26 percent in December. On a yearly basis, however, inflation is likely to accelerate past 280 percent. 

The policy change also comes as the government is in the midst of a record peso debt swap, attempting to exchange as much as 55 trillion (US$65 billion) of Treasury notes due this year for ones maturing between 2025 to 2028. 

The doveish policy move contrasts with February guidance from the International Monetary Fund in its most recent review of Argentina’s US$44-billion programme, where staff wrote “going forward, the authorities agreed that the monetary policy stance would need to be tightened to support money demand and disinflation.” More broadly, IMF officials have long insisted Argentina keep interest rates above inflation to incentivise savings in pesos and cool prices.

Following a similar rate cut in December, along with a 54 percent currency devaluation, many Argentines got out of 30-day peso deposits, transferring the money to their bank accounts to spend or dollarise. 

Monetary authorities in Buenos Aires noted Monday that while rates are coming down, the amount of money in circulation — or the monetary base — has declined 17 percent in inflation-adjusted terms since Milei took office. Keeping a tight grip on the monetary base has helped cool prices on a monthly basis so far. 

While monthly inflation continues to cool and the parallel exchange rate strengthens, the trade off is a steep recession this year. Milei’s austerity measures wiped out social security spending and wages adjusted for inflation, or real wages, which are at their lowest level since 2003. 

by Patrick Gillespie, Bloomberg

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