Argentina’s Central Bank weighs rate hike amid IMF talks

Argentina’s Central Bank is weighing its first interest rate increase in over a year as it seeks to bring borrowing costs closer to inflation amid talks with the International Monetary Fund over a new financial programme.

The monetary authority is considering the hike to narrow the gap in real interest rates – the rate after adjusting for inflation – in coming weeks, according to a person with direct knowledge of the matter, who asked not to be named commenting on internal policy discussions. Argentina’s benchmark rate currently stands at 38 percent, well below the country’s annual inflation of 51 percent, leaving the South American nation with a negative real rate of about 13 percentage points, one of the world’s biggest.

The strategy shift after 13 months of unchanged borrowing costs comes with the IMF calling last week for the country to adopt an “appropriate monetary policy,” including interest rates that exceed inflation. The person dismissed concerns that the policy change would imply an abrupt departure, saying the Central Bank’s annual effective rate – which includes compounding interest – is already above 45 percent, closer to inflation.

Argentina is negotiating a new programme with the Washington-based organisation to reschedule payments on over US$40 billion owed from a previous 2018 agreement that failed to lift the crisis-prone economy.

Talks have recently picked up momentum following a legislative election last month after little progress in the first two years of government by President Alberto Fernández, with the person expecting to reach an agreement at IMF staff-level before the deal is debated by Congress and the Fund’s board.

“Argentina’s Central Bank has been fuelling rather than fighting inflation for the last two years – and the sooner it changes its course, the better,” Adriana Dupita, Latin America economist at Bloomberg Economics, said. “We’d read a rate hike ahead of a formal deal with the IMF as a sign that government and Fund officials are finally converging on a programme both sides can accept.”

As part of the negotiations, Argentina is requesting that the IMF reimburse the country with about US$3.8 billion that the government is using to pay back some of the loan’s maturities this year, the person said. That includes a US$1.8-billion payment due Dec. 22 that Argentina will pay using so-called special drawing rights, or SDRs.

An IMF spokesperson declined to comment and referred questions to its statement published December 10.

The person also said that no loosening of Argentina’s strict capital controls currently in place is being considered as part of a future IMF programme, nor an abrupt devaluation of the peso. The official exchange rate set by the Central Bank has already begun to depreciate at a faster pace in the past two weeks, the person said.