Argentina: Central Bank maintains interest rate at 133% – 12/13/2023 – Market

Argentina’s central bank will maintain the basic interest rate at 133% per year, the monetary authority said in a statement this Wednesday (13), and will impose a new “moving parity” that weakens the peso by 2% per year. month after a strong devaluation.

The statement was released a day after Economy Minister Luis Caputo, under Argentina’s new libertarian president, Javier Milei, announced a package of economic measures to tackle the deep fiscal deficit, triple-digit inflation and the scarcity of international reserves. .

“All monetary policy tools will be aimed at achieving monetary stability and reducing inflation,” the central bank said in a lengthy statement.

On Tuesday, Caputo announced a series of orthodox measures to deal with the severe financial crisis, including drastic spending cuts and a 54% devaluation of the official peso exchange rate to 800 per dollar.

In the context of annual inflation approaching 180% and poverty above 40%, the government also said it will cut transport and energy subsidies and reduce public works to eliminate the fiscal deficit.

“This leads us to an expectation of zero deficit (…) Monetary issuance to finance the Treasury is eliminated,” said presidential spokesman, Manuel Adorni, at a press conference this Wednesday.

“We need credibility, which cannot be achieved by spending more than we have (…) These are measures without an option, there was no option. In terms of urgency, they were the right measures,” he stated.

During the election campaign, Milei promised to eliminate the country’s strict capital controls, with multiple exchange rates, which were implemented to protect scarce central bank reserves. Currently, the difference between the official exchange rate and that of the informal market is 191.9%.

“This government did not sit with a patient with a toothache. We found a patient in intensive care about to die,” Adorni said.

The central bank argued that the exchange rate adjustment introduces a “new and important factor: the incentive for production and exports and a disincentive to continue artificially increasing imports. A genuine improvement in the trade balance will be an essential driver” to recover the level of international reserves.

Peso falls by more than 50% and Stock Market appreciates by 7%

The day after the announcement of its devaluation, the Argentine peso suffered a fall of 54.24% at the beginning of trading this Wednesday.

The first electronic record stood at 801 units per dollar at 10:02 am (Brasília time), against a previous close of 366.55 units.

“The dollar at 800 pesos is the highest value since the end of convertibility”, when the peso’s parity was one to one in relation to the dollar in the 1990s, recalled analyst Salvador Vitelli, noting that the devaluation “is a little bigger than the market expected”.

“Argentina needs to promote a flexible and reliable exchange rate. Maintaining the exchange rate fluctuation in a context of rising inflation will again result in an overvalued exchange rate in short order. This would set Argentina up for another large – and potentially disorderly – devaluation in the future “, designed the consultancy Capital Economics.

The Argentine Stock Exchange was up 6.2%, at 11:05 am, at 1,072,661.76 points, renewing the record for the highest level during the day. During the year, the S&P Merval index accumulated an appreciation of 430.80%.