Banco Central de la República Argentina's move to raise its benchmark interest rate by about 1,000 basis points in recent days in an effort to stem currency depreciation is a credit negative for Argentine banks, Moody's said.

Between March 8 and March 12, the central bank between hiked its key rate to 62.1% in order absorb excess liquidity following a 4% depreciation of the Argentine peso on March 7.

Higher interest rates promote loan delinquencies, expand funding expenses and negatively impact economic activity and subsequently, banks' business projections, the rating agency noted.

Moody's also warned that the recent rate increase could also reduce loan demand in the country. It noted that peso-denominated loans have shrunk by more than 20% since the rate hikes began in late August 2018.

Argentina's nonperforming loans also rose to 3.1% of gross loans as of December 2018, its highest level since 2010.

In the fourth quarter of 2018, deepening economic recession and higher interest rates resulted in loan deterioration, which made it difficult for the companies to refinance their liabilities. Therefore, returning to higher interest rates will further the declining asset risk metrics of the banks.

"The recent rate hike is intended to absorb excess liquidity and help cap growth of the monetary base, which is a key condition of Argentina's recent deal with the International Monetary Fund," the rating agency added.