MNI INTERVIEW: 200BP Argentine Rate Cuts Likely By March-Forte
MNI (BRASILIA) - The Central Bank of Argentina is likely to cut its interest rate by 200 basis points to 27% between late February and early March, a former advisor to the BCRA governor told MNI, adding that borrowing costs might end the year at 24% as inflation declines.
"We see that as inflation declines, the central bank's interest rate will continue to decrease. We expect the next move to be a 200-basis-point rate cut by the government, from 29% to 27%," Federico Forte, who left the BCRA in 2019 and is now principal economist at BBVA Research Argentina, said in an interview.
“The interest rate will decrease more slowly than inflation to consolidate disinflation. Our forecast for the end of the year is that rates will be at 24%," he added.
BCRA cut rates by 300 basis points to 29% in January, though analysts had expected an even larger cut of 400 basis points. It was the ninth cut during the government of President Javier Milei.
POSITIVE SURPRISES
Forte stressed that Argentina’s economic cycle has exceeded the expectations of both the market and policymakers, under Milei’s program based on fiscal balance, monetary discipline and a controlled exchange rate.
"Inflation is slowing faster than anticipated, and economic activity has been recovering since mid-2024. When Milei took office, annual inflation was at 211%, but it dropped to 118% by the end of 2024. Market forecasts for 2025 now range between 25% and 30%, a significant improvement," he said.
In his view, this economic progress has boosted Milei’s popularity, and the central bank remains focused on consolidating inflation’s decline. The crawling exchange rate peg is being gradually lifted, with full liberalization expected by year-end, he said.
ENDING CRAWLING PEG
"I believe the government will maintain the crawling peg at least until elections, benefiting from an increase in energy exports that bring in foreign currency. After the elections, a move toward greater exchange rate flexibility and the eventual lifting of FX controls is expected," he said.
The former BCRA economist said part of Argentina's negotiation with the International Monetary Fund over its USD40 billion debt might involve reshaping monetary policy.
"One of the things being discussed with the International Monetary Fund is what will be the final framework. According to the government, a resolution is expected before April, as they aim to reach an agreement with the IMF. The new framework will not be implemented before the elections, but at the very least, there should be clarity on the direction," Forte said.
TRUMP TARIFFS
Milei’s good relations with President Donald Trump could allow him to negotiate some exemptions from U.S. tariff policies, he said.
"During Macri’s presidency, Trump raised tariffs on aluminum and steel. Since Macri had a good relationship with Trump, Argentina managed an exemption and was left out of those tariffs. So, this has happened before," he recalled.
Trump imposed a 25% tariff on Mexico and Canada, along with 10% on goods and services from China, starting in early February, but agreed to put the new levies for Mexico and Canada on hold for a month after negotiations. He also slapped 25% tariffs on all steel and aluminum imports, likely starting in early April, as well as threatened a new regime of reciprocal tariffs.