Argentina’s Central Bank cuts its benchmark interest rate to 29% in response to decreasing inflation. The decision coincides with the government’s reduction of the peso’s depreciation rate. However, risks remain if inflation does not align with expectations, as indicated by economist Leonardo Anzalone. This cut marks the ninth since President Milei took office, showcasing a shift in economic policy amidst persistent inflation challenges.
Argentina’s Central Bank has lowered its benchmark interest rate by 300 basis points to 29% amid declining inflation in the country. Announced in an emailed statement, the new rate will take effect on Friday. This decision aligns with the government’s plan to decrease the official monthly depreciation rate of the peso from 2% to 1% starting February 1, which is intended to manage inflation more effectively.
The rate cut reflects the bank’s confidence in persistently decreasing inflation levels, according to economist Leonardo Anzalone from Buenos Aires-based CEPEC. Anzalone cautioned about potential risks if inflation doesn’t fall as anticipated, which might lead to a rise in dollar pressure and expectations of peso devaluation. Lowering borrowing costs enables the government to maintain a benchmark rate that roughly matches inflation, reducing its liabilities.
This recent cut is the ninth since President Javier Milei assumed office in December 2023, when the interest rate was at a staggering 133%. Milei’s strategy to lower interest rates aims to realign them with inflation, deviating from traditional monetary policies. Such actions are seen as a necessary response, as interest rates previously lagged significantly behind inflation levels.
Investors had expected the Central Bank to announce a rate cut in its meeting on January 16, especially after indicating a controlled depreciation of the peso. Instead, the bank held rates steady until the government revealed the reduction in the peso’s depreciation rate coincided with an annual inflation rate of 118%. The last adjustment before this occurred on December 5.
Despite numerous capital and currency controls still in effect, Argentina aims to manage the peso’s depreciation while adjusting rates. President Milei has pledged to remove these controls, which could compel the government to raise rates to prevent currency flight. Moreover, the International Monetary Fund supports interest rates that exceed inflation for a stable economic recovery.
The Argentine Central Bank’s monetary policy has been under scrutiny, particularly regarding its strategy to combat high inflation. Traditionally, benchmark interest rates are set above the inflation rate to control currency depreciation and stabilize the economy. However, President Javier Milei has implemented unconventional measures, including rate cuts that aim to bring interest rates in line with inflation, which was exceptionally high in Argentina, indicating a significant shift in economic management.
The Central Bank’s cut in the benchmark rate to 29% signifies a strategic move to counteract inflation pressures in Argentina, coinciding with a reduction in the peso’s depreciation rate. While this approach seeks to balance economic stability, it carries inherent risks, including potential inflation fluctuations. The government’s overall efforts to overhaul monetary policy may have lasting impacts on future economic conditions and investor confidence.
Original Source: batimes.com.ar
