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Argentina’s central bank will alter its exchange rate scheme and speed the rebuilding of its hard currency reserves, as President Javier Milei tries to quell investor concerns about the country’s chronically low supply of dollars.
The monetary authority said in a statement on Monday that starting January 1 it would expand the upper and lower limit of the peso’s exchange rate band each month according to the previous month’s inflation rate, rather than by 1 per cent a month as under the current system.
Monthly inflation ran at 2.5 per cent in November.
It added that the central bank would start a reserve-buying programme “consistent with the evolution of money demand and liquidity in the exchange market”, saying that in their base-case scenario the plan would allow for the purchase of $10bn by December 2026.
The moves represent the biggest changes to Argentina’s exchange rate scheme since it was introduced in April as part of a $20bn deal with the IMF.
Economists and investors have heavily criticised the existing policy, which Milei has used to strengthen the peso in order to curb inflation, for delaying the build-up of hard currency reserves that Argentina needs to repay debts and pay for imports.
Reserves are running perilously low, and the government has fallen more than $10bn short of an accumulation goal set by the IMF, economists estimate.
The scarcity contributed to a damaging run on the peso in October as investors feared Argentina would run out of dollars to sustain the currency’s exchange-rate bands.
The yield on the 10-year Argentine government bond fell by 0.05 percentage points to 10.32 per cent following Monday’s announcement, according to Bloomberg pricing. Yields move inversely to prices.
Without changes, the scheme would have all but guaranteed further strengthening of the peso in real terms, because Argentina’s inflation is running above 2 per cent each month, more than the previous 1 per cent depreciation of the band’s upper limit.
Gabriel Caamaño, an economist at Outlier consultancy in Buenos Aires, said the change “would help somewhat” to avoid that and boost reserves, but “would probably not be enough to satisfy all of investors’ doubts about the scheme”.
Investors have called on Milei to take advantage of renewed optimism around his government following his victory at October’s midterm elections to remove Argentina’s remaining currency controls and fully float the peso.
But economy minister Luis Caputo has repeatedly ruled out a full elimination of the bands, telling local media last month that it “wasn’t worth the risk” given Argentina’s history of abrupt currency devaluations.
He added that the existing scheme “allows people to sleep easy knowing nothing will happen to the exchange rate”.
Additional reporting by Kate Duguid in New York
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