Argentine peso rises on new measures

Bloomberg

The Argentine peso gained as the government and the central bank announced measures to control inflation after prices rose more than expected in March for the third consecutive month.
The peso climbed as much as 2.3 percent before paring gains to finish trading up 1.1 percent at 41.9 per dollar. Some investors saw the announcements as boosting President Mauricio Macri’s chances of re-election this year. Still, the yields on Argentine bonds due 2028 rose 13 basis points to 10.6 percent.
Central bank President Guido Sandleris said that the bank would hold its currency band at current levels until the end of the year, halting a policy of gradual depreciation and potentially signaling tighter monetary policy. The government followed up the next day by saying companies had agreed to freeze prices on 64 food items and utility bills. While some analysts said the measures smacked of desperation and panic, the market as a whole gave the peso the benefit of the doubt amid low trading volume.
“It’s an inflation rate that’s too high,” Sandleris said. “I think analysts and investors understand very well that the process of reducing inflation isn’t linear and it takes time.”
The inflation rate rose to almost 55 percent in March, with consumer prices rising 4.7 percent in the month, exceeding all of the forecasts in a Bloomberg survey of analysts. The pick-up in price growth came after the central bank tightened monetary policy twice in the past four weeks.

DESPERATE MEASURES
“These measures all show a government increasingly desperate and concerned over its electoral prospects and with no clear plan to reverse this,” Eurasia Group’s Daniel Kerner and Ana Abad said in a report. Even Sandleris seemed skeptical over the potential use of price controls.
The government “doesn’t believe that freezing prices by decree, by law, will resolve the problem of inflation,” he said the day before the freeze was announced. “Historically, price freezes have ended badly.”
The central bank is concentrating on the exchange rate to limit price growth. Policy makers will now aim to keep the peso trading between 39 and 51 pesos to the dollar until year-end and won’t buy dollars if it strengthens outside of the band as it had previously.
Earlier in April, Sandleris said the bank would maintain its benchmark interest rate at or above 62.5 percent until the end of the month to cool inflation. It was 66 percent, the highest in the world.
Several food companies agreed with the government to freeze prices for at least six months on products from sugar to milk. Government officials will also halt price hikes on gas, electricity and public transportation.