Argentina's Central Bank Cuts Interest Rate Amid Slowing Inflation

Argentina's central bank has reduced its benchmark interest rate by 300 basis points to 29%, as inflation continues to decelerate within the nation's second-largest economy.

The bank's board, in an emailed statement, attributed the cut to tempered inflation expectations, effective from Friday. This move is concurrent with the government's planned deceleration of the currency's monthly depreciation rate from 2% to 1% on February 1st. This controversial adjustment to the "crawling peg" policy, perceived by some as contributing to peso overvaluation, endeavors to further curb inflation.

"The central bank is wagering on sustained inflation decline," said Leonardo Anzalone, economist and director of Buenos Aires-based CEPEC, cautioning, however, "Should inflation not decelerate as anticipated, it could strain the dollar and elevate devaluation expectations."

By lowering borrowing costs, the government aligns its benchmark rate with inflation while gradually reducing liabilities, a strategy it has adopted throughout the past year. This rate serves as the benchmark for Treasury instruments as well.

Marking the ninth rate cut since President Javier Milei assumed office in December 2023, when borrowing costs stood at 133%, this tactic has emerged as a distinctive component of Milei's strategy to combat inflation. Initially, Argentina's interest rate trailed inflation by almost 13 percentage points. However, it has gradually approached a neutral real rate, as per a recent central bank report.

Analysts had anticipated the monetary authority to implement a rate cut during the weekly directors' meeting on January 16th, following the central bank's announcement of the reduced official currency depreciation rate. However, the rate remained unchanged. The announced alteration in the peso's depreciation followed a report by the statistics agency revealing a reduced annual inflation rate of 118%. The last rate cut was implemented on December 5th.

Argentina maintains a series of capital and currency controls, facilitating sustained rate cuts while meticulously managing the peso's depreciation. Milei has pledged to abolish these controls this year, potentially necessitating more appealing rates to counter potential currency flight. The International Monetary Fund, currently negotiating a new loan program with Argentina, has consistently advocated for interest rates exceeding inflation.