Pressure is once again building on Argentina’s peso after the central bank lowered borrowing rates over the past month, sowing doubts among investors about whether President Cristina Kirchner is serious about corralling one of the world’s highest rates of inflation.
The peso in recent days has ended four months of stability, weakening slightly in the country’s official market. It closed Thursday at 8.06 per dollar, down 0.8% so far this month. It has fallen more steeply in the underground currency market, which acts as a barometer of confidence in the peso. On Thursday, it closed at 11.73 per dollar, firming 1.4% on the day but 10% weaker since the start of the month, according to online newspaper Ambito.com, which tracks black-market rates.
“I would be very wary about some sort of [currency] event this summer,” said Daniel Freifeld, managing director of U.S.-based Callaway Capital Management LLC. He sees lower rates as a worrisome sign of complacency by the government over imbalances in the economy. His firm sold half of its Argentine bondholdings this month to lock in profits after the rally following January’s peso devaluation.
The central bank’s move to loosen monetary policy comes after it nearly doubled interest rates to almost 30% during January and February to contain the fallout from the country’s biggest currency slide since the 2001 debt default. The rise in rates meant that for the first time in years, borrowing costs were approaching inflation.
But since early April, the bank has trimmed rates about two percentage points even as inflation has remained high.
The government says prices rose 11.9% through April from January, but it hasn’t given an annualized figure. Some private-sector forecasts put annual inflation close to 40%. When interest rates fall well below the rate of inflation, Argentines have fewer incentives to hold pesos.
Many analysts think the central bank’s about-face came from political pressure from the administration of President Kirchner. Speculation has centered on a rift between Economy Minister Axel Kicillof, an advocate of pro-growth policies, and central-bank chief Juan Carlos Fabrega, whose tighter money policies early in the year stabilized the currency but likely slowed economic growth further.
Argentina’s central bank has limited autonomy, as the president has broad discretion to hire and fire its board members and governor.
Mrs. Kirchner’s chief of staff, Jorge Capitanich, on Wednesday denied there was a rift between the two men. He said that the country’s fiscal policy was “reasonable” and that interest rates were aligned with the exchange rate, adding that the government has observed speculative activity by financial groups aimed at damaging the economy.
Argentina has just $28 billion of dollar reserves to defend the peso. Other moves the government could take to shore up the currency include keeping interest rates high or cutting spending. But those policies would likely be unpopular. Cuts to expensive natural-gas and water subsidies announced in March were followed last week by almost $2 billion in additional spending on popular social programs.
