Argentina's government is bolstering its economic defenses as it battles runaway inflation that hit 109% in April, fast draining central bank foreign currency reserves, a weakening peso and simmering market fears of a sharp-shock devaluation.
The economy ministry announced a package of measures on Sunday including new interest rate hikes, more central bank intervention in currency markets and fast-tracked deals with creditors after inflation overshot all forecasts last week.
An official source told Reuters the rate hike would be 600 basis points, bringing the rate up to 97%. That would follow back-to-back hikes totaling 1,300 basis points in April.
Investment bank J.P. Morgan said an "onslaught of inflation" had forced the government to take "emergency measures".
"The Casa Rosada (presidential palace) is concentrating for now on seeking resources to contain the bleeding of reserves and alleviate the impact of the rise in prices," it said.
Argentina's inflation rate has accelerated despite price controls and regular rate hikes, raising fears of a return to hyperinflation that hit the country just over 30 years ago, the last time 12-month price increases went into triple digits.
Meanwhile, reserves of dollars have slumped, hurt badly by a historic drought hammering main cash crops soy and corn even as the central bank has spent hard currency to prop up the peso, which hit a record low in popular parallel markets last month.
That's created a dilemma for the government: how to tame inflation and avoid a crash in the currency, while protecting the scarce foreign currency reserves in the bank. Some analysts estimate net reserves are indeed negative.
"If the BCRA (central bank) speeds up a devaluation, it will be adding more gasoline to the fire. If it delays the exchange rate to use it as an anchor, it will sell more and more reserves cheap," said Roberto Geretto, a portfolio manager at Fundcorp.
"The situation is complex and the commandment 'you shall not devalue' is costing ever more. But devaluing without a plan could be a leap into the void."
Markets are watching political developments closely as Argentina heads towards general elections in October, as well as negotiations with the International Monetary Fund (IMF) to amend the country's $44 billion loan deal and speed up payouts.
"Investors are paying attention to signs from talks with the IMF, since receiving fresh funds - at least via rescheduling of disbursements - would be crucial to reduce exchange and financial tensions at this stage," said economist Gustavo Ber.
