Argentina pushes interest rates up to 40% to protect the peso

The Central Bank of Argentina raised interest rates in the country at 40% on Friday, the third big increase in eight days, in a continuing attempt to defend the weakening peso and put the lid on the soaraway inflation.

On Thursday, the Bank raised the cost of loans from 30.25% to 33.25% already picked them up from 27.25% for April 27.

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The peso has suffered with the foreign investors withdrawing their money from emerging market currencies to the dollar, to take advantage of the recent rate increase by the Federal reserve. However, in recent days, nervous Argentines have also been cashing in their pesos for dollars.

Argentina came under pressure because of its slow economic growth together with one of the highest rates of inflation in the world, which is currently running at an annual 25.4%.

The country is in the middle of the Pro-market economic reforms under its President, Mauricio Macri, and after the last of the growth rate, Finance Minister Nicolas Dujovne, was the government’s plan to cut this year’s inflation to 15%.

The Central Bank has said it will continue to use “all available tools” to achieve this goal.

The growth rate on Thursday did little to support the peso, which has lost 7.83% to 23 pesos per dollar. But growth on Friday has brought in the currency recover some places 21.7 pesos.

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Even so, the peso in worst emerging markets currencies this year, having lost since the beginning of January is about 19% of its value.

Dujovne also said Friday that the government intends to reduce the target level of the budget deficit from 3.2% to 2.7% of GDP, meaning it will need to borrow £3bn less this year.

Edward Glossop, Latin America economist at Capital Economics, said: “the risks in pesos was brewing for a while – large double budget and current account deficits, heavy dollar debt, entrenched high inflation and an overvalued currency.

“The real surprise is how quickly and suddenly everything seems to be escalating.”

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