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Argentina raises interest rates again to keep up with inflation

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The Central Bank in Argentina raised interest rates again yesterday, taking its monthly Leliq note from an annualized rate of 69.5 to 75 percent. The decision came a day after statistics bureau Indec reported 7-percent inflation in August, reaching 78.5 percent over 12 months.

That yearly inflation rate is effectively lower than the one offered by the Central Bank, if interests accrued monthly by owners of its Leliq note are reinvested, confirming Argentina’s turn to a positive interest rate policy over the last few weeks.

Analysts expect similarly high monthly inflation readings in the remainder of 2022, meaning that Argentina will likely end the year with inflation above 90 percent.

Hikes to public service costs and potential currency devaluation will add further inflationary pressures to the mix.

The decision to raise rates by 550 basis points means the Argentinian Central Bank has opted for hikes in nine of its meetings this year, contrary to policy seen throughout 2020 and 2021, in which the benchmark Leliq rate stood stable at around 40 percent.

The pace of the hikes has accelerated since Sergio Massa took over Argentina’s Economy Ministry, with three hikes totaling 2,300 basis points in the last six weeks.

That policy change has brought Argentina more in line with the International Monetary Fund guidelines on monetary policy, amid the country’s permanent negotiation over its outstanding USD 44 billion loan with the fund.

Authorities are hoping that more attractive rates will encourage investors to bet on Peso-denominated bonds instead of purchasing goods or foreign currency.

But the policy also has big risks, given that it increases the pace at which Argentina’s Peso-denominated debt grows, which could force the Central Bank to print more money to repay debts in the long run, resulting in even higher inflation figures.

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