Argentina Raises Key Rate to 40%, Bringing Economic Uncertainty
Initially, the currency fell, nevertheless then stabilized. in addition to in a show of market confidence, prices for the country’s government bonds rose, pushing interest rates lower. Those lower rates helped to stimulate economic growth. Argentina was even able to borrow inside the international markets again, raising $16.5 billion by selling debt in 2016.
“There was overconfidence on the part of policymakers about how much could be done given the constraints they had,” said Alvaro Vivanco, a strategist for covering Latin American bond in addition to currency markets for the Spanish bank BBVA.
In recent months doubts about the government’s commitment to reform have emerged. In January, Argentina’s central bank cut interest rates in addition to increased its inflation target, a move interpreted by some as weakening the government’s commitment to getting consumer prices under control.
“The central bank was cutting, with inflation expectations deteriorating,” said Gabriel Gersztein, head of Latin American strategy at BNP Paribas. “in addition to which was a wake up call for international investors.”
The global economic backdrop was also changing. With the United States economy on solid footing, its short-term interest rates are rising. which puts upward pressure on the United States dollar, in addition to also resulted in a slide for the peso. which decline inside the peso has accelerated in recent days, as foreign investors began to see their returns vaporized by the falling currency.
More people moved to the exits, in part related to a completely new income tax on foreign investors. in addition to as they began to pull out en masse, Argentina was suddenly facing a currency run.
Governments have a few tools they can use to stem the outflows of capital. One of them is usually to sharply raise interest rates. Those higher rates translate into potentially stronger returns for investors. As such, they can attract money into an economy, which helps to prop up a currency.
nevertheless which’s a tricky play to pull off.
Brazil raised interest rates sharply to stop an outflow of capital inside the late 1990s, ultimately pushing benchmark interest rates to roughly 40 percent. More recently, in 2014, Turkey suddenly ratcheted a key central bank rate coming from 4.5 percent to 10 percent, in order to stop a sell-off inside the lira.
which same year, the Central Bank of Russia pushed interest rates sharply higher — coming from 10.5 percent to 17 percent — to keep the ruble coming from collapsing in response to sanctions over the annexation of Crimea in addition to a sharp drop in oil prices. Russia also has one of the biggest interest-rate jumps on record, when in 1998 which rates reached 150 percent in an effort to try to stem another impending collapse of the ruble.
nevertheless high interest rates have economic costs. They makes which particularly difficult for businesses in addition to consumer to borrow money. The lack of spending, in turn, can slow growth, in addition to can ultimately spark a recession.
The key for Argentina will be to keep rates high just long enough to inspire confidence which policymakers have halted the currency run, nevertheless not so long which which drains the economy.
“which was done in order to stop the bleeding. which’s like you have someone inside the E.R. You need to take very short-term, bold decisions, ” said Mr. Gersztein, of BNP Paribas. “Then once you stabilize the patient, you need to take different decisions in order to make the patient get better in addition to recover.”
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