Argentina slashes interest rates to 40 per cent amid slowing inflation

Argentina has reduced its benchmark interest rate for the sixth time under President Javier Milei, reflecting confidence in the country's slowing inflation and a strategy to shrink the central bank’s debt-laden balance sheet.

According to Bloomberg News, the central bank announced on Tuesday that the key rate was lowered from 50 per cent to 40 per cent, continuing a downward trend from a peak of 133 per cent last December.

Since Milei took office on December 10, Argentina’s monthly inflation has shown signs of easing, dropping to 8.8 per cent in April from a 26 per cent in December.

Milei's economic team projects that consumer price increases will further decline to 3.8 per cent by September, a forecast more optimistic than the 5.8 per cent anticipated by analysts in a central bank survey.

Despite these monthly improvements, Argentina’s annual inflation rate remains alarmingly high at 289.4 per cent as of April, marking the highest level in nearly three decades.

This persistent inflationary pressure underscores the complexity of the economic challenges facing Milei’s administration.

The latest rate cut follows the International Monetary Fund’s (IMF) staff approval of the eighth review of Argentina’s $44 billion financial program.

If endorsed by the IMF’s executive board, this approval would provide Argentina with approximately $800 million to help meet its debt obligations to the IMF.

Milei’s approach to monetary policy contrasts with the IMF’s typical advice, which generally advocates for maintaining real positive interest rates.

However, Argentine officials argue that reducing borrowing costs will enable the central bank to manage its balance sheet more effectively by absorbing excess liquidity.

This step is seen as crucial before the eventual lifting of capital controls.

(With inputs from Bloomberg)