Argentina raises interest rates to 40%

Argentina's central bank has raised interest rates for the third time in eight days as the country's currency, the peso, continues to fall sharply.

On Friday, the bank hiked rates to 40% from 33.25%, a day after they were raised from 30.25%. A week ago, they were raised from 27.25%.

The rises are aimed at supporting the peso, which has lost a quarter of its value over the past year.

Analysts say the crisis is escalating and looks set to continue.

Argentina is in the middle of a pro-market economic reform programme under President Mauricio Macri, who is seeking to reverse years of protectionism and high government spending under his predecessor, Cristina Fernandez de Kirchner.

Inflation, a perennial problem in Argentina, was at 25% in 2017, the highest rate in Latin America except for Venezuela.

This year, the central bank has set an inflation target of 15% and has said it will continue to act to enforce it.

Despite the twin rate rises, the peso, which was fixed by law at parity with the US dollar before Argentina's economic meltdown in 2001-02, is now trading at about 22 to the dollar.

"This crisis looks set to continue unless the government steps in to reassure investors that it will take more aggressive steps to fix Argentina's economic vulnerabilities," said Edward Glossop, Latin America economist at Capital Economics.

"Risks to the peso have been brewing for a while - large twin budget and current account deficits, a heavy dollar debt burden, entrenched high inflation and an overvalued currency.

"The real surprise is how quickly and suddenly things seem to be escalating."

Mr Glossop said "a sizeable fiscal tightening" was planned for 2018, but it might now need to be larger and prompter.

"Unless or until that happens, the peso is likely to remain under pressure, and there remains a real risk of a messy economic adjustment."

Argentina's president Mauricio Macri is a controversial figure in a country that is still strongly divided ideologically.

But among international investors he is unanimously praised. Since coming to office, he moved swiftly to end capital controls and re-establish trust in economic data coming from Argentina.

However, he is not winning a crucial battle in the country - the one against inflation. Markets are taking notice and there has been a sell-off of the peso.

The opposition wants to stop Macri from removing subsidies in controlled prices, such as energy and utility tariffs, which may bring more inflation in the short term but could help bring it down from above 20% now to about 5% by 2020.

Friday was a day for emergency measures - a massive hike to 40% in interest rates and a commitment to bring down government spending.

Investors still believe Macri has a sound plan to recover Argentina, but they are not convinced he can see it through.