Argentina increased interest rates due to peso value plummet

Argentina’s central bank increased their interest rates to 40 percent on Friday. The increase is the third one in eight days and was done as an attempt to defend the decreasing value of the peso.

The rates increased from 33.25 percent to 40 percent. Last week, it was just increased to 27.25 percent to 30.25 percent. The peso has lost a quarter of its value over the past year, causing the said increase.

The decline of the peso was due to foreign investors moving their money from appearing market currencies into the dollar to benefit from the United States Federal Reserve’s recent increase in rates. Recently, Argentinians have also cashed in their pesos for dollars.

According to analysts, the crisis continues to inflate. Argentina is subjected to a pro-market economic reform program which was initiated by President Mauricio Macri who is seeking to reverse protectionism and high-government spending under the administration of Cristina Fernandez de Kirchner.

Inflation is reported to be a significant problem in the country. In 2017, the inflation rate was at 25 percent, making it the highest recorded percentage in Latin America, excluding Venezuela. The central bank is targeting a 15 percent rate and will continue to act on the matter to enforce it.

According to Edward Glossop, the economist for Latin America at Capital Economics, the crisis will continue unless the government convinces investors that they will do the necessary measures to fix Argentina’s economy. Risks to the peso just like large twin budget, current account deficits, heavy dollar debt burden, entrenched high inflation, and an overvalued currency have been prevalent.

Glossop also mentioned that a sizeable fiscal tightening was arranged for the year, but it might need to be larger and prompter. He added that unless or until that happens, the peso will continue to be at risk and a messy economic adjustment may remain.

The peso has also been labeled as the worst performing currency this year. It lost around 19 percent of its value since January.