Argentina Sells Less Notes in Auction Even After Rate Rise

  • 3 percentage-point increase represents biggest in 18 months
  • Move seeks to tame dollar demand following first-round vote

Argentina’s central bank sold 11.3 billion pesos in weekly notes, 5 percent less than at the previous weekly auction, even after raising interest rates by 3 percentage points Tuesday as the government tries to tame dollar demand ahead of a presidential election runoff. 

The central bank on Tuesday raised interest rates by the most in more than 18 months, lifting rates on its fixed-rate notes at its weekly debt auction to 28.93 percent and 29.35 percent, for 91 and 119-day securities, respectively. The bank had first set the weekly guidance late Monday with rates unchanged.

The move comes as the country’s foreign-currency reserves are near a nine-year low and the nation struggles to maintain an overvalued exchange rate. Due to restrictions on purchasing dollars at the official rate, Argentines buy greenbacks on the street for as much as 15.81 pesos per dollar compared to the official spot rate of 9.53. The last time the monetary authority took such a bold move to raise rates was February 2014 on the heels of a 20 percent devaluation when the guidance jumped 9 percentage points.

“This is trying to combat the rise of the dollar by making rates more attractive,” said Leonardo Chialva, a partner at Delphos Investment in Buenos Aires.

The central bank announced later Tuesday that banks must pass on the increase in rates to savers. The bank ordered financial institutions to pay a minimum of 26.3 percent on 30- to 44-day deposits, rising to as much as 29.1 percent for deposits of more than 180 days.

"Peso savings are growing steadily, showing the trust of those who save money in our national currency instead of options in foreign currency," central bank President Alejandro Vanoli said in a statement.

The measure follows an upset in presidential elections on Sunday where the opposition fared much better than expected and forced a second round on Nov. 22. To tame dollar demand, the government’s options include raising rates or cutting dollars sold to individuals for savings, which would be unpopular and could hurt the ruling party’s electoral chances, according to Puente strategist Alejo Costa.

“There’s a feeling that it’s not going to be enough," Costa said. "The rate would have to be way higher to contain the difference in the exchange rates now. This measure is a drop in the sea.”

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