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Argentine central bank hikes rate to 45%, sets Lebac cancellation program

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Argentine central bank hikes rate to 45%, sets Lebac cancellation program

Banco Central de la República Argentina on Aug. 13 hiked its policy rate to 45% from 40% in an unscheduled meeting as its monetary policy committee also announced a plan to gradually halve the stock of Lebac notes, after which they will only be held by Argentine banks.

Citing an "ongoing external situation" and lingering risks for inflation increasing further, the regulator raised the benchmark rate. It also announced it will not lower the rate until October, at the earliest.

The rate hike comes as the Argentine peso has continued to devalue sharply despite earlier efforts to stem the decline. The peso was down 2.63% against the U.S. dollar to during midday trading on Aug. 13 and now trades at 30.09 pesos to US$1, according to Bloomberg data. The currency has lost more than 38% against the dollar so far this year. Inflation, meanwhile, hit 29.5% in June.

The move also comes just days after the central bank installed a new, four-person monetary policy committee to determine the central bank's reference rate, among other decisions. The committee consists of the central bank's president, vice president and one board-selected director, along with the deputy head of economic investigations. It has been one of several moves taken since Finance Minister Luis Caputo replaced Federico Sturzenegger as the head of the central bank in June.

Lebac reduction plan

In a separate statement, the central bank introduced a plan to reduce the stock of its so-called Lebac notes, as a part of a new strategy under which it will conduct its monetary control through the seven-day Leliq note.

The current Lebac stock amounts to about 1.00 trillion Argentine pesos, with half in the hands of banking entities and the rest held by nonbanking investors. According to the plan, the stock will be halved by December, at which time the notes will only be held by Argentine banks.

The first of the auctions, where the plan will be carried out, will be held on Aug. 14. The central bank will offer up to 230.00 billion pesos in Lebacs to nonbanking investors, down from an estimated 330.00 billion pesos maturing on the same day. The regulator will repeat the scheme in the following months until it has reached its reduction goal.

In a statement, the IMF, which earlier this year granted Argentina a $50.0 billion bailout loan after its currency went into free-fall, supported the Lebac notes reduction plan.

"Implementation of this plan should remove an important source of vulnerability as well as help contribute to a more effective monetary policy framework," IMF spokesman Gerry Rice said. "The Fund supports the authorities’ efforts in this area which are consistent with the understandings reached under the IMF-supported Stand-By Arrangement."

As of Aug. 10, US$1 was equivalent to 29.00 Argentine pesos.

David Feliba contributed to this article.