Argentina hikes interest rates to 40% amid inflation crisis

Inflation in the Latin American country is currently running at 25.4 per cent

President Maurico Macri has implemented economic reforms and investor-friendly policies in Argentina

Argentina has jacked up its interest rates to 40 per cent in a drastic attempt to keep a lid on domestic inflation and stabilise its currency.

The Latin American country’s central bank announced the hike on Friday, the third in seven days, saying it would keep using the tools at its disposal to get inflation back down to it 15 per cent target.

Inflation in the country is currently running at 25.4 per cent, despite the investor-friendly economic reforms of President Mauricio Macri.

Argentina is one of several emerging market economies that have suffered from currency pressure in recent weeks as the US dollar has strengthened and foreign capital has been withdrawn.

“Investors are moving out of [emerging markets], frontier [economies], and other risky assets and so countries like Argentina remain at heightened risk,” said Win Thin of Brown Brothers Harriman.

Drastic measures

The value of the Argentinian peso has declined from 18.6 against the greenback in January to 23 this week.

President Macri succeeded the Peronist Cristina Fernandez de Kirchner in 2015 and has been seeking to reverse her policies of protectionism and high government spending.

“This crisis looks set to continue unless the government steps in to reassure investors that it will take more aggressive steps to fix Argentina’s economic vulnerabilities,” said Edward Glossop of Capital Economics.

“Risks to the peso have been brewing for a while – large twin budget and current account deficits, a heavy dollar debt burden, entrenched high inflation and an overvalued currency. The real surprise is how quickly and suddenly things seem to be escalating.”

According to the IMF's most recent Fiscal Monitor, Argentina's budget deficit in 2018 will be 5.5 per cent of GDP.

Combined with the country's maturing debt its total financing needs will be 14.5 per cent of GDP. This will fall to 11.2 per cent of GDP in 2019.

The IMF puts the government's gross net burden at 54.1 per cent of GDP.