In a bold move to combat climbing inflation, Argentina’s Central Bank has escalated its key interest rate by a steep six points, hitting a staggering 97%. This decisive action comes in response to inflation soaring to a 30-year high, surpassing a whopping 100% last month, a figure only surpassed globally by Venezuela and Zimbabwe.
The current crisis has seen investment in the Argentine peso dwindle, causing it to tumble by 23% against the US dollar this year. The central bank hopes that this significant rate hike will entice investors back to the troubled currency, thereby stabilising its value.
With the presidential election looming in October, Economy Minister Sergio Massa is under pressure. His political fortunes hinge on successfully stemming the tide of inflation and preventing further devaluation of the peso.
Yet, market analysts remain sceptical that this substantial interest rate hike can effect real change. Miguel Kiguel, a former deputy manager at the Central Bank of Argentina, expressed concerns that such measures, although essential in the fight against inflation, may take too long to make an impact in Argentina’s rapidly deteriorating economic situation.
Q1. Define the term central bank.
Q2. Explain one role of the central bank besides setting the interest rate.
Q3. Analyse the impact of increasing the interest rate on the Argentinian Economy.
Q4. Discuss whether monetary policy is the most effective way of controlling very high levels of inflation.
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