Argentina’s central bank (BCRA) decided to keep the benchmark interest rate steady at 118% during their last board meeting, despite the country’s inflation rate hitting an over 30-year high in August. The decision was made in the context of a deepening economic and political crisis, as the country faces a looming recession, negative foreign currency reserves, a weak peso, and a difficult negotiation with the International Monetary Fund (IMF) over a $44 billion debt deal.
The BCRA board members hoped that inflation in September would moderate a bit, according to a source familiar with the matter. “August inflation was higher than expected, so September’s will come lower than first anticipated… according to all high-frequency indicators,” the source said.
However, analysts have warned that the benchmark rate ought to be lifted to around 149% to curb price rises, with a central bank poll estimating inflation to end the year at around 169%. Argentina’s annual inflation reached 124.1% in August, with the monthly rate at 12.4%, its highest level since 1991. The cost-of-living crisis has eroded the purchasing power of millions of Argentines and increased social discontent ahead of the presidential elections scheduled for October.
Argentina’s political landscape shifts after primary election
The BCRA board members also considered the political cost of raising the interest rate too high, as it could further alienate voters from the ruling coalition of President Alberto Fernández. The government suffered a major setback in the open primary election last month, where it lost in almost every district to the opposition coalition led by former President Mauricio Macri.
The biggest surprise of the primary election was the emergence of radical libertarian Javier Milei as a potential contender for the presidency. Milei, who advocates for a minimal state, free markets, and individual rights, got 30% of the vote in Buenos Aires City, making him the favorite to win the presidential election in October.
Milei’s rise has shaken up the political scene in Argentina, where traditionally two major parties have dominated the electoral landscape. Milei has criticized both Fernández and Macri for their economic policies, which he blames for the country’s chronic problems of inflation, debt, and poverty. He has also vowed to default on the IMF debt and restore monetary sovereignty by adopting a gold standard.
Argentina seeks to renegotiate IMF deal amid uncertainty
Argentina’s economic woes have been exacerbated by the impact of the COVID-19 pandemic, which has hit hard its key sectors such as agriculture and tourism. The country has also struggled to access enough vaccines to immunize its population of 45 million people.
Argentina is currently in talks with the IMF to renegotiate the terms of a $44 billion loan agreement signed in 2018 under Macri’s administration. The deal was supposed to help stabilize the country’s finances and restore market confidence, but it failed to prevent a currency crisis and a default on sovereign debt in 2020.
Fernández has said that he wants to reach a new deal with the IMF that is more favorable to Argentina’s interests and allows for more fiscal and monetary flexibility. However, the IMF has demanded that Argentina implement structural reforms to address its fiscal imbalances, improve its institutional framework, and enhance its growth potential.
The outcome of the negotiation is uncertain, as both sides face internal and external pressures. The IMF is under scrutiny from some of its member countries, especially the United States, which is its largest shareholder and has a veto power over its decisions. The US has expressed concern over Argentina’s human rights record and its alignment with countries such as China, Russia, Iran, and Venezuela.
Argentina, on the other hand, is facing social unrest and political instability ahead of the presidential election, which could change the balance of power in Congress and affect its ability to comply with any agreement with the IMF. The country also needs to reach an agreement with its private creditors, who hold about $65 billion worth of bonds that were restructured last year.