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ECONOMY | 15-05-2023 14:37

Argentina's Central Bank ramps up interest rate to 97% as inflation soars

Argentina's Central Bank hiked its base interest rate Monday by six points to 97 percent, the first in a series of measures to tackle soaring inflation ahead of October's general election.

Argentina's Central Bank hiked its base interest rate Monday by six points to 97 percent as the government prepares to announce a spate of measures to tackle soaring inflation ahead of October's general election.

It is the second time in less than a month that the bank has ramped up interest rates as year-on-year inflation hit almost 109 percent in April.

The objective is "to promote positive real returns on investments in local currency and to act immediately to prevent financial volatility from acting as a driver of inflation expectations," the Central Bank said in a statement.

Local media outlets reported over the weekend the government will announce a raft of measures throughout the coming week, such as an intervention in the exchange rate, subsidies for the most vulnerable sectors and facilitating imports to bring down prices.

The measures were prepared at the weekend during a meeting headed by Economy Minister Sergio Massa aimed at finding a way to tackle Argentina's economic woes just months out from a general election. It is unclear when they will be formally unveiled.

With President Alberto Fernández already having announced he will not stand for re-election, Massa is one of the leading candidates to represent the ruling Frente de Todos coalition in the October 22 vote. The minister, however, has refused to confirm his candidacy. 

Argentina's economy is in turmoil. The peso lost 20 percent of its value against the dollar in a single week in mid-April. It briefly fell to 500 to the dollar on the informal 'blue dollar' exchange rate – about double the rate of the official one – before stabilising at 470. The official rate, at the time of writing, stands at 238.

The Central Bank has now responded by pushing up interest rates by 10 points to 91 percent.

Inflation hit its highest level in three decades in 2022, finishing the year on 94.8 percent. But it has kept on climbing and reached almost 109 percent year-on-year in April.

The cost of living has risen by 31 percent since January 1.

Last year, more than 39 percent of the population was living in poverty.

 

'Conditions deteriorating rapidly'

Fernandez and his economic team are hoping these measures will ease the massive demand for dollars. Argentina's Central Bank is not independent.

Many Argentines see converting their pesos to US currency as their only defence against the ravages of inflation.

"Economic conditions are deteriorating rapidly and will continue as the electoral process approaches," said Daniel Kerner, managing director for Latin America at the Eurasia Group, last week. "Reserves are at a critical level, with a severe drought hurting export revenues."

The drought has badly affected the agricultural sector, which is vital for the country's ability to source foreign currencies.

Since the start of the year, Argentina has lost more than US$5.5 billion in international reserves, which have dropped to US$33.5 billion, according to the Central Bank. Liquid reserves, multiple outlets reported last week, are now in negative territory,. 

Argentina is one of the largest producers of food in the region but sources from the Economy Ministry told the Télam news agency that the country would be forced to turn to food imports "to reduce the effective price of the public sale of fresh produce... and non-perishable dry goods in order to defend people's consumer power."

 

– TIMES/AFP

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