(Updates with peso close and results of short term debt auction)
By Scott Squires and Walter Bianchi
BUENOS AIRES, Oct 3 (Reuters) - Argentina’s peso rallied for a third straight day on Wednesday, after high-interest short-term debt issued by the central bank soaked up liquidity, a strategy that has raised concern about the sustainability of the country’s program.
Argentina’s central bank issued 109.5 billion pesos ($2.9 billion) in seven-day short-term debt, known as Leliq bonds, at interest rates of 71.267 percent, in an effort to sop up excess pesos in the foreign exchange market that might otherwise gravitate toward safe-haven U.S. dollars.
The bank says regular Leliq auctions are part of its anti-inflation plan.
While that has helped the peso strengthen against the dollar, the high interest rates are unsustainable in the medium term, according to economist Gustavo Ber at consultancy Estudio Ber.
“This monetary policy is very strong medicine, and while it has calmed the financial markets, it undermines the prevailing tax policy and does not strengthen the real economy,” Ber said.
The Argentine peso closed 1.22 percent stronger at 37.69 per U.S. dollar on Wednesday, bringing this week’s gains to 9.58 percent.
Under new leadership after the latest central bank chief quit last week, the monetary authority has said its main priority is controlling inflation, in part by implementing a peso trading band and not allowing peso liquidity to increase.
Inflation in Argentina is expected to top 44 percent by year’s end, according to the latest central bank poll.
The peso currency hit an all-time low of 42 to the greenback in August, forcing President Mauricio Macri to renegotiate his government’s standby credit line with the International Monetary Fund.
A new agreement was announced last week. The deal, upped to $57 billion from an original $50 billion, aims to assuage investor fears over whether the South American country will be able to service its international debts in 2019.
Reporting by Scott Squires, Walter Bianchi and Hugh Bronstein; editing by Cynthia Osterman and Rosalba O'Brien