March 15, 2019 / 3:56 PM / 5 months ago

Tightening the screws: Wall Street eyes high rates, peso strength after Argentina's hawkish turn

BUENOS AIRES (Reuters) - Argentina’s world-high interest rates are likely to stay elevated, while its currency could be bolstered by central bank moves to tighten monetary policy, Wall Street analysts said on Friday after the country unrolled measures to bring down inflation.

FILE PHOTO: A man shows Argentine pesos outside a bank in Buenos Aires' financial district, Argentina August 30, 2018. REUTERS/Marcos Brindicci/File Photo

The central bank said on Thursday it would extend its “zero growth” policy for the monetary base until the end of the year, indicating a level 10 percent below that previously planned, to help soak up pesos and tame rising prices.

Morgan Stanley said in a note that the central bank was “tightening the monetary program screws further,” suggesting the bank “won’t fall into the same trap” of allowing its policy rate to fall too low, too fast.

The benchmark rate, set by short-term “Leliq” notes, has risen around 20 percentage points over the last month after falling from a high above 70 percent in October to just above 40 percent in the middle of last month.

(GRAPHIC: Argentina's sky-high rates -

The recent rate spike came amid growing concern about resurgent inflation, which jumped 3.8 percent in February, and renewed fears about a flight from the peso, which lost half its value against the U.S. dollar last year.

The currency rose 1.98 percent on Friday to a two-week high of 39.99 per dollar after the central bank moves.

Credit Suisse said another plan announced by the Treasury on Thursday, to sell $9.6 billion in U.S. dollars by the end of the year in $60 million daily auctions, would bolster the currency further.

“These sales should join seasonal agricultural export inflows in supporting the peso in the coming weeks,” the bank said in a note, referring to the upcoming grains harvest that is expected to help bring in funds.

Central bank chief Guido Sandleris said on Thursday that high rates helped protect the peso while inflation was high, but added the bank would not take any “shortcuts” to tame prices.

Goldman Sachs described inflation levels - running at 51.3 percent over 12 months - as “intense.”

(GRAPHIC: Argentina's inflation problem -

Banks added that while the moves should calm volatility for now, uncertainty would rise ahead of national elections in October, with left-learning firebrand ex-President Cristina Fernandez de Kirchner looking to mount a comeback.

“Tight monetary policy and USD inflows from the IMF are supportive, but volatility has already picked up on the back of election risk,” Bank of America Merrill Lynch said in a note.

“There will likely be higher pressure to hedge the FX if former President Cristina Kirchner, who is considered less-market friendly than other potential candidates, announces she will participate in the race.”

Reporting by Gabriel Burin and Adam Jourdan; Editing by Dan Grebler

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