Argentina's central bank raised its monetary policy rate by a massive 6.75 percentage points to 40.0 percent on Friday, its third rate hike in a week, in an effort to calm down what it described as "disruptive behavior in exchange markets" and guarantee that inflation will decelerate.
The Central Bank of Argentina (BCRA) has now raised its benchmark rate by 12.75 percentage points since last Friday, April 27, when it first began its tightening campaign by raising the rate by 300 basis points. This was followed by another 300-basis point hike on Thursday, May 3.
"The monetary authority made these decisions in order to avoid disruptive behavior in the exchange markets as well as to guarantee the disinflation process and is ready to act again if necessary," the BCRA said, adding:
"The Central Bank will continue using all the tools at its disposal and will conduct its monetary policy to reach its intermediate inflation target of 15% in 2018."
BCRA said the latest rate hike on Friday came in reaction to the peso's depreciation against other emerging market currencies and there were signs that this latest hike may help reverse the peso's recent downward trend.
The peso immediately jumped 3.7 percent after Friday's rate hike to 21.45 per U.S. dollar and later settled at 21.85 to the dollar. The first two rate hikes had failed to reverse the peso's fall.
But the peso is still 7.3 percent below its level on April 26, before the tightening began, and 14.9 percent below the level at the start of 2018, pushing up import prices and thus inflation.
In addition to raising its policy rate, the central bank also took other measures to restore calm to financial markets, and said it would continue to intervene in foreign exchange markets, with both cash and term transactions.
On Thursday the BCRA said it had sold another $451 million, the day after its sold about $500 million. In March and April the central bank had sold $6.77 billion, more than 10 percent of its reserves, according to Reuters.
It raised the ceiling of its 7-day active pass rate to 47 percent from 38.25 percent, the passive rate raised to 33.0 percent, and one-day rates were raised to 57 percent for active passes and 28.0 percent for the passive.
With effect on Monday, the net positive global position of foreign currency held by financial institutions may not exceed 10 percent of liquid equity
In parallel with the central bank's moves, the government of Mauricio Macri cut its target for the primary fiscal deficit this year to 2.7 percent of Gross Domestic Product from 3.2 percent and confirmed its commitment to the 15 percent inflation target.
The latest troubles to hit Argentina were triggered on Dec. 28, 2017 when Macri's government - which is facing an election in October 2019 - pushed back its goal of lowering inflation to 5 percent by one year to 2020 and raised the inflation target to 15 percent from a previous 8-12 percent.
On Jan. 9 and Jan. 23 the central bank then lowered its key rate in two steps by a total of 150 basis points, arguing the rise in inflation is transitory and will continue its downward trend once the one-off impact of a higher in regulated prices dissipates.
But inflation is still rising and rose to 25.6 percent in March from 25.4 percent in February.
Macri's government, which took office in 2015, has been slashing government subsidies to utilities and transportation in an effort to curb the fiscal deficit.
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