Argentina Cuts Interest Rates to 80% as Inflation Slows

Argentina's central bank unexpectedly cut its benchmark interest rate to 80% from 100%, as policymakers see monthly inflation falling while the peso continues to strengthen against the US dollar in parallel markets.

Despite the annual inflation rate exceeding 250%, the Central Bank pointed to a group of factors that explain the move to reduce interest rates late last night, including the steady rebuilding of monetary reserves.

 Economists polled by Bloomberg expect monthly increases in consumer prices to reach 15%, continuing the slowdown from 21% in January and 26% in December. However, inflation is likely to accelerate to exceed 280%, year on year.

The monetary policy shift also comes at a time when the government is conducting record peso debt swaps, as it attempts to swap 55 trillion pesos ($65 billion) worth of Treasury bonds due this year with ones maturing between 2025 and 2028.

The move contradicts guidance the IMF issued in February during its recent review of Argentina's $44 billion program, with IMF staff writing that "the authorities agreed on the need to tighten monetary policy over the coming period to support debt demands and curb inflation. 

Moreover, the “International Monetary Fund officials have demanded that interest rates in Argentina remain above the inflation rate to stimulate peso saving and tame consumer prices.”

After a similar interest rate cut in December, coupled with a 54% devaluation of the currency, many Argentines gave up their peso-denominated deposits for 30 days, transferring the money to their bank accounts to spend or convert into dollars.

Monetary authorities in Buenos Aires noted on Monday that while interest rates are falling, the amount of money in circulation, the so-called "monetary base", has fallen by 17% in inflation-adjusted figures since President Javier Milei took office. Maintaining a tight grip on the monetary base has also contributed to calming prices on a monthly basis so far.

While monthly inflation continues to slow and the exchange rate strengthens in the parallel market, trading is witnessing a sharp recession this year. 

Milei's austerity measures led to the elimination of spending on Social Security and inflation-adjusted wages (real wages), which reached their lowest levels since 2003.