May 3, 2018 / 3:25 PM / 6 months ago

UPDATE 6-Argentina peso crashes 7.8 pct despite 2nd interest rate jolt

(Adds central bank’s official dollar purchase statement, comment from Goldman Sachs, date of April inflation data release)

By Hugh Bronstein, Walter Bianchi and Eliana Raszewski

BUENOS AIRES, May 3 (Reuters) - Argentina’s central bank raised its benchmark interest rate by 300 basis points to 33.25 percent on Thursday, but the second steep rate increase in less than a week failed to stop the country’s peso currency from swooning to a record low.

The local currency tumbled 7.83 percent to 23 per U.S. dollar. It had hit 21.2 to the greenback on Wednesday, the first trading day due to a holiday after the bank hiked the rate to 30.25 percent from 27.25 percent on Friday.

The central bank, which over the past week has abandoned its schedule of reviewing monetary policy every other Tuesday, said in a Thursday statement it would continue using all the tools at its disposal to achieve its 15 percent inflation target for the year and could raise the interest rate again.

“Central bank should deemphasize the 15 percent inflation target for 2018. It is now even less credible as a target than it was before the recent currency move,” Goldman Sachs said in a note to clients.

Consumer prices in Argentina rose 2.3 percent in March, putting 12-month inflation at 25.4 percent.

“The interest rate shock is a step in the right direction but there is no guarantee that it will immediately succeed in anchoring the foreign exchange market,” Goldman Sachs said.

April consumer price data is set to be released on May 15.

The government had adopted policies aimed at spurring economic growth ahead of President Mauricio Macri’s expected 2019 re-election bid. The perception of political pressure on the bank to grease economic activity by keeping the money tap open had cast doubt on its willingness to raise interest rates.

Those doubts had evaporated by Thursday afternoon. The plummeting peso pointed to a lack of investor confidence in Latin America’s No. 3 economy, which is blighted by one of the world’s highest inflation rates despite Macri’s investor-friendly policies.

Emerging market assets in general have been under pressure in recent days against a backdrop of a rising dollar and higher global borrowing rates. Last week’s and Thursday’s rate increases were by far the biggest adjustment since the bank established its monetary policy rate in 2016.

Argentina’s century bond slipped to 86.03 on the dollar from 86.9 after Thursday’s rate announcement. The 100 year paper was issued in 2017 when optimism over Macri’s fiscal belt-tightening policies was still flying high among investors.

Some analysts said the central bank may need to act again.

“The market is imposing conditions more than the central bank and this should be the reverse,” said Hernán Nacaratto of local brokerage Neix. “The bank should take more initiative.”

The central bank has heavily intervened in the spot market.

It said in a statement that it sold $451 million on Thursday after selling about $500 million the day before. This week’s interventions came on top of the bank selling $6.771 billion in March and April, or more than 10 percent of its reserves.

Camilo Tiscornia, director of C&T Asesores Economicos, said the peso had weakened over the past two weeks despite intervention due to higher interest rates abroad, the implementation of a capital gains tax on foreign investors last month and opposition in Congress to Macri’s efforts to cut subsidies.

“If you think this is something transitory, intervening with reserves makes sense. But if you see this as lack of local confidence and external factors the only option is to raise the rate,” said Tiscornia, also a former central bank economist. (Additional reporting by Eliana Raszewski and Rodrigo Campos; Writing by Hugh Bronstein and Caroline Stauffer; editing by Chizu Nomiyama and Tom Brown)

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