April 27, 2018 / 3:41 PM / a month ago

UPDATE 8-Argentina central bank tightens money spigot with sudden rate hike

(Adds Friday’s central bank intervention in foreign exchange market)

By Hugh Bronstein and Walter Bianchi

BUENOS AIRES, April 27 (Reuters) - Argentina’s central bank surprised markets on Friday by jolting its key interest rate up to 30.25 percent from 27.25 percent, citing weakness of the local peso against the U.S. dollar and vowing to act again if high inflation persists.

The peso strengthened 1.31 percent after the move to 20.65 per U.S. dollar. The local currency had fallen sharply since the bank’s most recent, regularly scheduled monetary policy meeting on Tuesday, apparently prompting the rate hike.

“Given the dynamics of the exchange market, the monetary policy committee met outside of its pre-established schedule and decided to increase its monetary policy rate,” the bank said in a statement. It was the biggest one-shot adjustment since the bank established its monetary policy rate two years ago.

Higher utility bills caused by a cut in state subsidies have contributed to inflation reaching 25.4 percent in the 12 months through March, one of the world’s highest rates.

“The decision was made with the aim of guaranteeing the disinflation process and the central bank is ready to act again if necessary,” the bank’s statement said.

It promised to “continue using all tools at its disposal and conduct its monetary policy to reach its inflation target of 15 percent for 2018.”

The government has adopted policies aimed at spurring economic growth ahead of President Mauricio Macri’s expected 2019 re-election bid. The perception of political pressure on the bank to grease economic activity by keeping the money tap open had cast doubt on its willingness to raise interest rates.

“The market had doubts about the possibility that the bank would increase rates,” said Gabriel Zelpo, chief economist at local consultancy Elypsis. “Today’s decision shows the bank is really engaged in calming the market and fighting inflation. That was not so clear before.”

Early on Friday, the peso had slumped 1.63 percent to an all-time low of 20.89 to the greenback, traders said, despite massive central bank dollar sales designed to stop the currency from weakening further.

The bank said it sold $1.38 billion on the spot market on Friday, after a combined $2.3 billion it sold on Wednesday and Thursday.

“I think it was a necessary rate hike by the central bank, as the investment community is uncomfortable with the current foreign exchange equilibrium level,” said Alberto Bernal, chief strategist at XP Securities.

Friday’s rate increase was nonetheless surprising after central bank chief Federico Sturzenegger said earlier this month that the bank would wait to evaluate May inflation before deciding on a possible change in monetary policy.

“Inflation has to fall a lot beginning in May” in order for Argentina to meet the 2018 target of 15 percent, Sturzenegger said on April 16. “If that scenario does not play out, we have to do what we have to do, which in this case is raise the interest rate.” (Additional reporting by Maximiliano Rizzi, Jorge Otaola and Maximilian Heath; writing by Hugh Bronstein; editing by Chizu Nomiyama and Dan Grebler)

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