Buenos Aires — The Argentine government’s official exchange rate for the peso against the US dollar has jumped by 22% this Monday, following Javier Milei’s surprise victory in the country’s primary elections on Sunday. The Central Bank (BCRA) brought the rate up to ARS$350, where it will remain until the October general elections, and also hiked the key Leliq interest rate.
The monetary authority raised its monetary policy rate by 21 percentage points, taking the the Nominal Annual Rate to 118%, and the Effective Annual Rate to 209%. This new rate will imply a significant increase in the quasi-fiscal deficit: the BCRA’s interest-bearing liabilities stand currently just below ARS$18 trillion and accrue over ARS$1 trillion in interest per month.
The BCRA also decided to raise the minimum guaranteed rate for fixed terms to 118% for 30-day deposits for up to 30 million pesos, bringing the real-term monthly yield to 9.7%. For the rest of the fixed-term deposits in the private sector, the minimum guaranteed rate was set at 111%, with effective monthly interest of 9.17%.
How Does the Exchange Rate Affect Inflation in Argentina?
Analysts have pointed out that this devaluation will add even more pressure to inflation, which had already begun to shown signs of further acceleration. Economists aren’t ruling out prices could rise at double-digit monthly pace in August or September.
Gabriel Caamaño, of Consultora Ledesma, explained that the devaluation “will have an impact in August”, as inflation was already estimated around 8.5% or 9% this month” on sharp hikes in meat prices, utilities, and the import restrictions. “In these intense 15 days, with this 20% devaluation, you could easily see double-digit inflation in August,” he warned. “And September will start very hot as well,” he added.
In line with this view, Matías Carugati, director at Alphacast, is also expecting a strong inflationary impact. According to the economist, Economy Minister Sergio Massa has devalued the currency, raised interest rates, and promised to reduce the deficit to comply with the IMF. “He didn’t do it before the primaries to avoid sinking his own electoral ship. He’s doing it today because it gives him more time to recover before the general elections,” he assessed.
Regarding the impact on prices, he believes that movements could start to be seen in the coming days. “Perhaps the jump in the August CPI won’t be that strong because it’s an average for the month, but on a weekly basis, we should start noticing it. Now, in September, if there’s post-devaluation acceleration, it will likely be evident,” he warned.
Asked if he believes inflation could reach double-digit monthly levels, he said, “I don’t rule it out, but I can’t say for sure if we will reach that. We need to look at the numbers in the coming weeks.”
Official August inflation data will be released on September 14th, while the September data will be published by INDEC on October 12th, just 10 days before the general elections.
Further FX pressure
For Alfredo Romano, director of the consulting firm Romano Group, Argentine inflation could even surpass double digits in all the remaining months of 2023, leading to an annualized inflation rate of over 200%. This is because, according to the economist, the Central Bank is unlikely to maintain the official exchange rate without further changes until October. “There may still be more room to cover, as $365 (the official retail exchange rate) is not an equilibrium exchange rate.”
“While there is no clarity about the economic proposal of the next government and the political agreements to face the reforms that Argentina needs to carry out are not materialized, the dollar will inevitably experience a lot of volatility,” he anticipated.