Soaring interest rates in Argentina

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Interest rates at the Central Bank of Argentina reached reportedly the world’s highest rate last week, standing at 40 per cent.

On Friday 4th May, the Central Bank, led by its President Federico Sturzenegger, made the bold move to increase interest rates for the third time in eight days. The interest rates had sat at a high of 27.25 per cent in the previous month before increasing by three points to 30.25 per cent and again to 33.25 per cent on Thursday.

The move comes in a long-running struggle against high rates of inflation in the country. In 2017 Argentina faced the second highest level of inflation in the region, behind Venezuela. The nation’s previous government’s policy of quantitative easing – printing more money – may well have inflamed the country’s inflation problem.

Last week, multiple foreign investors took their capital out of Argentina, prompting the Central Bank’s string of increases to interest rates. $951 million of reserves were sold last week, a small sum in comparison to the $6.7 billion of reserves sold over the previous two months. The sudden loss of foreign investment may be linked to a capital gains tax against foreign visitors implemented last month.

The Argentinian President, Mauricio Macri, has taken a pro-market stance in the face of the economic problems facing the country. Macri’s mission is to improve the free flow of capital and liberalise markets, in contrast to his predecessor’s policies, widely seen as protectionist.

Macri is well-respected by foreign investors for his determination to work towards a free market, free movement of capital and fewer economic regulations. While interest rates have increased, the Macri government announced that government spending would fall. Despite his promising economic principles, Macri and his government face a number of tough decisions.

Though arise to 40 per cent seems extraordinary, this may be one move of many to remedy Argentina’s economic difficulties. The Central Bank of Argentina maintains that it will take all the necessary steps to reduce inflation, aiming to meet the government’s target of 15 per cent.

There are several options available to the Argentinian government, but all bear their own costs in terms of long-term implications for the economy, as well as the political party’s popularity. Raising interest rates, as Sturzenegger has elected to do, is one way for governments to respond to high inflation. High interest rates improves the chances of better returns for investors. However, at home, the ordinary Argentinian may find it hard to borrow money with such a high interest rate to pay. If businesses and ordinary people don’t have the money to engage, the economy’s health will only decline. For Macri, this might invite criticism from trade unions who point out that rapidly increasing numbers of workers are out of pocket.

Overall, Macri faces a difficult balancing act of tackling high inflation versus winning the confidence of foreign investors and maintaining good trading relations with other nations in the area. Though 40 per cent currently marks a world leading high, historically, the country’s interest rates have been far higher. Argentina’s interest rates once reached 1389 per cent in 1990, putting this crisis into perspective.

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