Central Bank to keep key interest rate unchanged despite surging inflation

Argentina’s Central Bank will likely keep its key interest rate unchanged despite inflation reaching its highest in more than three decades because policymakers expect slowing price pressures later in the year, two officials with direct knowledge of the matter said.

Central Bank policymakers plan to hold the benchmark Leliq rate at the current 118 percent level during a board meeting on Thursday, according to the people, who asked not to be named to discuss upcoming policy decisions. Annual inflation jumped again to 124 percent in August, according to data published by the INDEC national statistics bureau on Wednesday.

The officials expect the monthly inflation rate to remain above 10 percent in September after hitting 12.4 percent last month, before slowing to single-digit territory in October, one of the people said.

A Central Bank spokesman said the agency doesn’t comment in advance on rate decisions.

Already one of the world’s fastest inflation rates, Argentina’s problem with out-of-control price increases is only worsening after the government devalued the official currency by 18 percent in August, a day after an unexpected primary election result that saw outsider libertarian economist Javier Milei take first place.

Businesses in Buenos Aires and beyond hiked prices overnight after the currency plunge, fuelling concerns about a return to the hyperinflation suffered in late 1980s and early 1990s.

August’s 12.4 percent monthly increase is the fastest since February 1991, and was even higher than the 11.5 percent median estimate by economists in a Bloomberg survey.

The outlook ahead is equally worrying, with economists polled by the Central Bank saying annual inflation will reach almost 170 percent by the end of the year, while gross domestic product will contract three percent, according to a monthly survey also published Wednesday.

The International Monetary Fund has asked Argentina to maintain its rate positive in real terms, which strips out inflation, as part of the country’s US$44-billion agreement, leading BCRA, as the Central Bank is known, to last raise rates in August together with the currency devaluation.

Price increases in August, double the monthly pace seen in July, confirms the rapid pass-through that a currency devaluation has on products in Argentina, explaining at the same time why the government has tried to avoid such measures for years.

Galloping inflation has in addition helped fuel Milei’s political ascent, challenging the candidate for the ruling Peronist coalition — Economy Minister Sergio Massa — which placed third in the primary last month. Massa recently announced a slew of drastic measures to lure more voters, such as eliminating income taxes for all but the top one percent of the population and giving government employees a raise, even if this is likely to fuel inflation further.

The real interest rate still remains positive despite August data because it incorporates expected inflation, senior Economy Ministry official Gabriel Rubinstein told Bloomberg News in a separate telephone interview. Monthly inflation could return to single digits in October, he said, echoing the Central Bank officials.

Argentines will cast their ballots in the general election on October 22, which could be followed by a run-off vote between the top two candidates on November 19, and a new government will be inaugurated in December.