Argentina’s Inflation Crisis: Central Bank Hikes Rate to 133%

Argentina is facing a severe inflation crisis, as the annual inflation rate reached 138.3% in September, the highest level since the early 1990s. The central bank responded by raising its key interest rate to 133%, the sixth hike this year, in a desperate attempt to curb the price surge.

Inflation Out of Control

Argentina has been struggling with chronic inflation for decades, but the situation has worsened in recent months due to a combination of factors, such as:

  • The Covid-19 pandemic, which disrupted the economy and increased public spending
  • The political uncertainty ahead of the presidential election on Oct. 22
Argentina’s Inflation Crisis: Central Bank Hikes Rate to 133%
Argentina’s Inflation Crisis: Central Bank Hikes Rate to 133%
  • The depreciation of the peso, which lost more than half of its value against the dollar this year
  • The lack of confidence in the government’s economic policies and the central bank’s credibility

The inflation rate in September was 138.3%, according to the official statistics agency. This means that prices have more than doubled in a year, eroding the purchasing power of consumers and businesses. The inflation rate was also much higher than the central bank’s target range of 25% to 35% for 2023.

Central Bank’s Response

The central bank announced on Thursday that it raised its benchmark interest rate by 15 percentage points to 133%, following a 21-point hike in August. The central bank said that the decision was based on “the evolution of inflation expectations and the recent behavior of monetary aggregates and exchange rates”.

The central bank also said that it will continue to monitor the inflation situation and take additional measures if necessary. The central bank’s goal is to bring down the inflation rate to a single digit by 2025.

However, many economists doubt that the rate hike will have a significant impact on inflation, as the monetary policy is undermined by other factors, such as:

  • The fiscal deficit, which is financed by printing money
  • The exchange rate controls, which create a large gap between the official and the black market rates
  • The low level of credit and savings in the economy
  • The high inflation expectations and indexation mechanisms

Some analysts also warn that the high interest rate could have negative consequences for the economic activity and growth, as it increases the cost of borrowing and reduces the incentive for investment.

Political Implications

The inflation crisis has also become a major issue in the presidential election campaign, as it affects the living standards of millions of Argentines. The incumbent coalition, led by Economy Minister Sergio Massa, is facing a strong challenge from opposition candidates, who criticize the government’s handling of the economy and propose different solutions.

One of the most controversial candidates is Javier Milei, a libertarian economist who advocates for dollarization, or replacing the peso with the US dollar as the national currency. Milei has gained popularity among some voters who are fed up with inflation and currency devaluation. He has also sparked controversy by urging people to stop saving in pesos and by accusing the central bank of being a “mafia”.

Milei’s comments have been condemned by other candidates, investors, banks and politicians, who accuse him of destabilizing the market and undermining the national sovereignty. They also argue that dollarization is not feasible or desirable for Argentina, as it would imply giving up monetary policy autonomy and adjusting to external shocks.

The election outcome will have a significant impact on Argentina’s economic future, as it will determine the direction and credibility of the policies to address the inflation crisis.

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