Argentina hikes interest rate to 97% amid soaring inflation and election

Argentina’s central bank has raised its base interest rate by six points to 97% to combat soaring inflation, which reached nearly 109% year-on-year in April. This marks the second increase in less than a month, as the government plans to announce a series of measures to address the economic crisis ahead of the General Election in October.

The central bank stated that the move aims to create real returns in the local currency and prevent financial volatility from driving inflation expectations. Local media reports suggest that the government is set to unveil additional measures, such as intervening in the exchange rate, providing subsidies for vulnerable sectors, and facilitating imports to lower prices.

Economy Minister Sergio Massa led a meeting over the weekend to discuss solutions to Argentina’s economic challenges, as the country approaches its general election. With President Alberto Fernandez not seeking re-election, Massa is considered one of the leading candidates to represent the ruling Frente de Todos (Everyone’s Front) party on October 22.

Pablo Tigani, director at the Hacer consultancy, said the measures will “fight inflation without stopping economic activity: a very difficult task. Everything stays the same.”

Argentina’s economy, the third largest in Latin America, is in a state of turmoil. The peso lost 20% of its value against the US dollar in just one week in mid-April, and inflation reached its highest level in three decades last year, ending at 94.8%. The cost of living has increased by 31% since the beginning of the year, and over 39% of the population is living in poverty.

The central bank and President Fernandez hope that their measures will help curb the enormous demand for US dollars, as many Argentines view converting their pesos to US currency as their only protection against inflation. However, restrictions on purchasing foreign currencies have fueled the informal exchange market.

Daniel Kerner, managing director for Latin America at the Eurasia Group, warned last week that, “Economic conditions are deteriorating rapidly and will continue as the electoral process approaches. Reserves are at a critical level, with a severe drought hurting export revenues.”

The drought has severely impacted the agricultural sector, which is crucial for Argentina’s ability to obtain foreign currencies. Since the beginning of the year, the country has lost over US$5.5 billion in international reserves, which now stand at US$33.5 billion, according to the central bank.

Argentina, one of the region’s largest food producers, may be forced to import food to reduce the effective price of fresh produce and non-perishable dry goods, to protect consumers’ purchasing power, sources from the economy ministry told the Telam news agency, reported Bangkok Post.