Argentina's central bank left its monetary policy rate unchanged at a sky-high 60.0 percent, as expected by investors, and repeated its pledge that it would not lower the rate until at least December to ensure that monetary conditions maintain a tightening bias.
The Central Bank of the Argentine Republic (BCRA) said its decision to keep the rate steady was justified by an expected rise of inflation in August and September despite the slowdown seen in July.
In July Argentina's monthly inflation rate slowed to 3.1 percent from 3.7 percent but year-on-year the inflation rate rose to 31.2 percent from 29.5 percent in June with the central bank saying prices in August would be affected by an increase in regulated prices while inflation in September would be affected by the exchange rate volatility that was seen at the end of August.
BCRA said the fall in the peso's exchange rate at the end of August will affect prices more than previously expected and therefore delay the decline in inflation.
The BCRA has raised its policy rate by 31.25 percentage points since late April when it changed course and began raising rates to defend the tumbling peso and curb soaring inflation.
The last rate hike was on August 30 when the key rate was raised 150 points at the second unscheduled meeting by the central bank's monetary policy committee, known as Copom.
Argentina's inflation is accelerating due to a lethal cocktail of higher regulated price, as the government of Mauricio Macri tries to undo years of heavy government subsidies and regulation, while it faces higher import prices and thus rising consumer prices from a plunge in the exchange rate of the peso which raises import prices.
Government cuts to electricity, water, gas and transportation subsidies, along with lower infrastructure and housing spending, is starting to pay off, with the primary fiscal deficit down almost 27 percent in the first half of the year to 106 billion pesos, or 0.8 percent of Gross Domestic Product from last year.
In the first seven months of this year, the primary deficit amounted to 0.9 percent of GDP for a 0.7 percent annual decline, BCRA said.
As part of a deal with the International Monetary Fund in June, the target for the primary fiscal deficit was lowered to 1.3 percent of GDP in 2019 from 2.2 percent.
In its policy statement, BCRA said Argentina's finance ministry had announced even more stringent fiscal targets than those agreed with the IMF in June.
For 2019 the target for the primary fiscal deficit was confirmed at 1.3 percent while the 2020 target was set at a surplus of 1.0% of GDP compared with an earlier target of a balanced budget.
"This fiscal policy constitutes a contribution to lower inflation in coming months," the central bank said.
But Argentina is still saddled with debt from years of excess government spending and the government debt to GDP ratio has been rising steadily in the last six years to hit 57.1 percent of GDP in 2017 from 53.6 percent in 2016.
On top of rising inflation, Argentina's economy is slowing and the central bank said the economy is expected to shrink this year and then remain at an unchanged level in 2019.
Argentina's peso, which has been depreciated steadily this year, took a sharp tumble at the end of August and was trading at 37.95 to the U.S. dollar today, down 51 percent since the start of this year.
In June the International Monetary Fund and Argentina agreed on a 3-year, $50 billion support package that included new inflation targets for BCRA and a new central bank law that will strengthen its operational and financial autonomy.
The new targets were for inflation below 22 percent for the second quarter of 2019 and for inflation of 17 percent for 2019. For 2020 an inflation target of 13 percent has been set and for 2021 a target of 9 percent. By 2022 BCRA is targeting 5 percent inflation, its estimate of price stability.
Argentina is currently in talks with the IMF about speeding up financial support.
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