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Projected Argentina interest rate in 5 years: Benchmark Leliq rate will only drop from astronomical levels if inflation slows

By Fitri Wulandari

Edited by Jekaterina Drozdovica

10:05, 13 September 2022

Banco Central de La Republica Argentina (BRCA) - Argentina’s central bank building - in Buenos Aires.
Benchmark Leliq rate will only drop from astronomical levels if inflation slows. – Photo: Alexandr Vorobev/Shutterstock

Banco Central de La Republica Argentina (BRCA), Argentina’s central bank, hiked the policy rate for the 28-day term to 69.5% in August as the country battled 20-year high inflation.

For decades, Argentina has been struggling with double-digit inflation. The war in Ukraine, which has kept commodity and energy prices elevated, has added more fuel to the price growth in the country.

To make matters worse, prolonged political infighting that started in July with the resignation of Finance Minister Martin Guzman, increased economic uncertainty.

What will be the projected Argentina interest rate in 5 years? Here we take a look at the country’s central bank, its monetary policy over the years and other factors that could drive Argentina interest rate forecasts for the next 5 years.

What is BCRA?

Banco Central de La Republica Argentina (BRCA) is the central bank of Argentina. 

When it was founded in 1935, BRCA was a mixed private-public institution. It became a full state-run institution in 1946 and started operating under the umbrella of the Ministry of Finance in 1949. 

BRCA’s responsibilities included issuing notes and coins, controlling the banking system and acting as the government's financial agent. 

In the 1990s, the country’s financial system underwent reform with the introduction of two key laws: the Convertibility Law of 1991 and the Central Bank Charter of 1992. The convertibility law pegged the Argentine peso exchange rate at a fixed US dollar rate.

The Central Bank Charter established the BRCA’s independence from the executive and legislative branches and designated maintaining the domestic currency's value as its main objective. The charter was adjusted to be in line with the new Argentina peso-US dollar peg.

The charter was amended in March 2012, restoring several mandates that had been removed. The institution’s primary mandate was maintaining financial and monetary stability.

BRCA is led by a board made up of a Governor, a Deputy Governor and eight members. The BRCA’s Monetary Policy Council (COPOM), which oversees monetary policy decisions, is composed of the Governor, the Deputy Governor, a board member chosen by the Board, and the Deputy General Manager for Economic Research.

The COPOM’s responsibility is to set up the benchmark rate, the rates for repo transactions and instruments issued by the BCRA, as well as the conditions and other specifications for carrying out monetary policy. 

The committee holds monetary policy rate discussions on the second Tuesday of every month and sets the benchmark rate on the third Tuesday. 

Historical BCRA monetary policy 

The BRCA uses the short-term interest rate as its main monetary policy tool to control inflation. Its policy rate had changed several times before the COPOM decided on 7 August 2018 that the benchmark rate was that on liquidity bills (LELIQs). 

For 2022, the BCRA’s monetary target is reducing the annual inflation rate to 5%. It was lower than 17% for 2019, 13% for 2020 and 9% for 2021. The three inflation targets were included in a $50bn Stand-By Arrangement from the International Monetary Fund (IMF) in 2018.

According to economic data provider Trading Economics, Argentina interest rates averaged 61.25% from 1979 to 2022. The all-time high rate was in March 1990 at 1,389.88% and the record low was in March 2004 at 1.20%.

The BRCA adjusted the Leliq rates several times during 2020 when the Covid-19 pandemic hit, bringing the benchmark rate to 38% in December 2020, from 61% in December 2019. The Argentina interest rate was held at 38% over 2021 despite inflation remaining high at 52.1%.

On 6 January 2022, the BRCA began tightening monetary policy by lifting the Lelic rate to 40%, from 38%, amid an uptick in the inflation rate. The BCRA has raised the benchmark interest rates in Argentina six times this year, lifting it to 69.50% in August 2022.

Benchmark interest rate in Argentina, 2018 – 2022

Inflation to soar above 90% in 2022

The primary factor influencing central banks' decisions is inflation. The banks typically have targets for inflation to maintain and ensure stable growth. High inflation for long periods often triggers an interest rate hike. When inflation slows significantly, interest rates can follow suit.

Due to recession, Argentina has been battling extremely high inflation for decades. Argentina experienced an average annual inflation rate of 300% between 1975 and 1990 as the nation increased its money supply to stave off a recession. According to Rabobank Research, the country’s inflation rate reached 3,080% in 1989. 

The rise in global energy and food prices as a result of Russia’s invasion of Ukraine has worsened inflation in Argentina, which stemmed from currency depreciation. In July 2022, Argentina’s annual Consumer Price Index (CPI) soared to 71%, from 50.7% in January.

Analysts polled by BCRA expected inflation to reach 95% by December this year. The survey participants predicted inflation to ease to 84.1% in 2023 and 63.1% in 2024. Meanwhile, Scotiabank’s forecast published on 10 September saw Argentina’s inflation average 82.5% in 2022 and 95% in 2023. 

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Inflation in Argentina was expected to reach 60% by the end of the year, according to a June forecast by Deloitte, a result of rising food and fuel costs, price increases for regulated goods, and an acceleration of the official exchange rate depreciation in the context of high and persistent inflationary pressure.

In July 2022, BBVA Research forecast Argentina’s inflation to average 95% in 2022 and 105% in 2023.

Argentina’s economic growth to slow

Argentina has experienced a protracted period of economic downturn, marked by numerous recessions, hyperinflation and rising debts, due to external headwinds and political instability.

From 1950 to 2016, Argentina experienced 14 recessions, each lasting an average of 1.6 years, according to the World Bank. As a result, the country’s economy has spent one-third of the time since 1950 in recession, the most of any country in the world after the Democratic Republic of Congo.

On 23 August, Indec reported that Argentina’s economy was estimated to grow 6.3% in the first half of 2022. Restaurants and hotels registered the highest activity growth, followed by mining. 

Participants in the BRCA’s monthly survey forecast the country’s economy to grow 3.6% in 2022, slowing to 1% in 2023. For 2024, the participants expected variations from unchanged to 2%. 

Scotiabank expected Argentina’s gross domestic products (GDP) to grow by 3% in 2022, after about a 10% expansion in 2021, and slow to 1.5% in 2023. 

BBVA Research projected Argentina’s economy to grow by 2.5% in 2022 before contracting -1.5% in 2023. 

Deloitte had a similar forecast, expecting Argentina’s annual GDP to moderate to 3% year-over-year (YoY) in 2022 and to 2.5% in 2023. 

Analysts did not provide GDP forecasts beyond 2024, due to volatility and uncertainty.

Risks from prolonged political infighting

Argentina’s economy was thrown into turmoil with the abrupt exit of Economic Minister Martin Guzman on 2 July. Guzman, who announced his departure via Twitter, was responsible for Argentina's historic $44bn agreement with the IMF.

On 25 March, the IMF approved a 30-month extended arrangement for Argentina worth $44bn under the Extended Fund Facility (EFF). The facility aimed, among other things, to support the country’s balance of payment, budget and tackle high inflation. 

Guzman was replaced by economist Silvina Aida Batakis on 4 July, but she resigned after less than a month in office, according to media reports. Sergio Massa was appointed in early August to replace Batakis. 

On 5 September Fitch Solutions predicted that the Argentinian government's divisions would deepen over the ensuing months as Massa was expected to announce painful economic reforms.

“Massa has yet to clarify his economic plans, but has promised to cut government spending and to push through painful reforms necessary to comply with Argentina’s IMF deal and to stabilise the economy,” the firm said.

Argentina interest rate forecast for next 5 years

As inflation is expected to hit near triple digits amid the expected slowing in economic growth, what is the projected Argentina’s interest rate in 5 years? Let’s take a look at what analysts have to say. 

Trading Economics in its Argentina long-term interest rate forecast expected the Argentina interest rate to reach 75% by the end of this quarter, 78% in 2023 and 70% in 2024.

BBVA Research’s Argentina interest rate prediction for the third quarter of 2022 saw the Argentina interest rate average 70% in 2022. The Argentina interest rate was expected to rise to 75% in 2023, according to the firm. 

Deloitte, in its Argentina interest rate forecast in June, expected Argentina’s interest rate to average 48% in 2022 and 42% in 2023. 

Scotiabank’s interest rate predictions in Argentina forecast Argentina’s interest rate to average 76% in 2022 and 72.5% in 2023. 

Final thoughts

Most analysts expected the Argentina interest rate to stay in double-digits, hitting above 70% at least until 2024. Analysts did not offer Argentina interest rate forecast beyond 2024, due to uncertainties surrounding political instability in the country.

Remember, analysts’ views on Argentina projected interest rates in 5 years can be wrong. You should conduct your own research before trading. Remember, past performance does not guarantee future results. And never trade money that you can't afford to lose.

FAQs

Why is Argentina's interest rate so high?

Rising commodity and energy prices have worsened the inflation rate in Argentina, prompting the country’s central bank BRCA to increase its policy rate aggressively to combat inflation.

How high will Argentina interest rates go?

As of 12 September, Trading Economics forecast Argentina’s interest rate to rise to 78% in 2023. Bear in mind that analysts’ projections on Argentina’s interest rate can be wrong. 

It’s important to remember that currency markets are highly volatile, making it difficult for analysts to come up with accurate long-term predictions. 

We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

What will Argentina’s interest rates be in 5 years?

Analysts did not provide forecasts for Argentina interest rate in 5 years. The longest forecast from Trading Economics predicted Argentina interest rate to trend at around 78% in 2023 and 70% in 2024.

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