(Adds financial and political context, plan to extend maturities of short-term Lebac securities, bylines)
By Hugh Bronstein and Walter Bianchi
BUENOS AIRES, May 22 (Reuters) - Argentina’s central bank held its key interest rate steady at 40 percent on Tuesday, confirming its hawkish stance on inflation by saying tight monetary policy was needed to keep the weakened peso from putting further upward pressure on consumer prices.
The local currency has swooned 15.5 percent so far in May to 24.5 per U.S. dollar. The reference rate “must be kept at high levels to contain the transfer to prices of the depreciation of the peso,” a statement issued by the central bank said.
It said it stood by its 15-percent 2018 inflation target, a goal seen by private economists as unrealistic considering that 12-month inflation through April was at 25.5 percent.
A rally in the U.S. dollar last month focused the market’s attention on Argentina’s increasing dollar-denominated debt load and weak fundamentals, including high inflation and a high fiscal deficit. The country became a scapegoat for investors looking to cut their emerging market exposure.
The peso plunged, prompting the central bank to sell reserves and hike interest rates to 40 percent on May 4. Days later the government requested an “exceptional access standby arrangement” from the IMF.
Seeking an IMF deal is politically risky for President Mauricio Macri. Many Argentines blame the IMF for the country’s 2001 financial meltdown, punctuated by a sovereign bond default and steep currency devaluation, which tossed millions of middle-class Argentines into poverty.
Left-leaning activists have taken to the streets to protest the IMF negotiations taking place in Washington. Macri has also gone out knocking on doors to try to convince average Argentines that his policies will attract the investment needed to establish sustainable economic growth.
The central bank has indicated it would intervene in the spot market if the peso were to weaken to 25 per dollar, a level it has not hit in days.
Argentina has a “dirty float” that allows the market to set the value of the peso while allowing the central bank to sell dollars to prop up the local currency at times of exchange rate volatility.
The bank may extend maturities of some of its short-term Lebac securities in a bid to even out debt payments, a spokesman for the central bank told Reuters.
This improvement to Argentina’s debt profile would come after Macri sent an olive branch to the bond market this month by cutting Argentina’s 2018 deficit goal to 2.7 percent of gross domestic product from 3.2 percent. (Editing by Susan Thomas; Editing by Sandra Maler)