MercoPress. South Atlantic News Agency

Argentina might raise interest rates to keep US dollar at bay

The BCRA is looking for alternatives to avoid a sharp devaluation of the Argentine peso

Argentina's Central Bank (BCRA) is considering raising the interest rate, in accordance with a suggestion from the International Monetary Fund (IMF), it was reported Wednesday in Buenos Aires.

The move would help make Treasury debt securities more attractive and avoid pressure on the US dollar, although it could also cool down economic activity and increase the BCRA's quasi-fiscal deficit, analysts explained.

BCRA sources quoted by Buenos Aires media admitted the measure was under study although the magnitude planned for the rise was not disclosed.

The basic rate currently stands at 38% annually, between 13 and 14 percentage points below inflation, and has remained unchanged since the outbreak of the COVID-19 pandemic in March 2020.

The initiative should increase the demand for Argentine pesos and discourage the purchase of foreign currency, especially at a time of year where due to seasonal reasons there is a liquidity surplus in the market. But behind this dilemma at the macroeconomic level, the measure could bring on more expensive investment projects and a stagnation in economic activity, which the administration of President Alberto Fernández has been trying to avoid.

That is why the Government has lowered the rate from 63% at the end of Mauricio Macri's presidency to the current 38%.

The IMF has issued a statement calling for “an adequate monetary policy with positive real interest rates”, among other requirements to agree on a program that allows renegotiating the US $ 45 billion debt. In the IMF's view, the rate hike would make the government placements of bonds in pesos more attractive, thus reducing the need for financing through BCRA transfers which lead to higher inflation.

The effective rate (the one resulting from renewing a 30-day placement every month after collecting interests) is just over 44%, which makes the actual gap with yearly inflation of just some six percentage points. From that perspective and according to rumors among financial circles, the increase in the basic interest rate does not need to be very sharp.

Foreign trade as per a conversion scale between Argentine pesos and Russian rubles is also under consideration to help keep the exchange rate with the US dollar at bay, as a large devaluation seems more inevitable every day.