March 8, 2019 / 2:41 PM / 9 months ago

UPDATE 3-Argentina sharply hikes rates to stem peso slide

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By Jorge Otaola and Hernan Nessi

BUENOS AIRES, March 8 (Reuters) - Argentina sharply hiked its key benchmark interest rate on Friday, helping revive the country’s peso currency after it had hit a record low against the U.S. dollar the previous day.

The peso strengthened, closing up 3.16 percent at 41.2 to the dollar, after the central bank offered short-term “Leliq” notes at over 59 percent, the highest rate since early January, in a bid to lure traders back to the currency after economic concerns sparked a flight on Thursday.

Higher rates encourage market players to sell dollars in order to buy peso-denominated Leliq paper, strengthening the peso.

The peso has been battered as President Mauricio Macri’s government struggles with rampant inflation and a shrinking economy ahead of elections this year. It had bottomed out at 42.5 on Thursday.

The peso weakened sharply this week and is down around 10 percent for the year, renewing fears of another sell-off after it lost around half its value against the greenback in 2018.

Argentina’s central bank sold 101.326 billion pesos ($2.47 billion) of “Leliq” notes on Friday at an average annual interest rate of 59.061 percent, traders said. That was sharply higher than Thursday’s average of 51.862 percent.

That was also the second auction of the day after the bank sold 104.865 billion pesos at 56.765 percent. The bank said on Friday it would double Leliq auctions to two per day from one.

Macri faces tough economic challenges ahead of make-or-break national elections in October. The country has one of the highest inflation rates in the world, at close to 50 percent last year. On Wednesday, a central bank poll of economists raised a forecast for 2019 inflation to 31.9 percent.

The country’s sky-high interest rates, which peaked at over 70 percent in October, had been coming down until the middle of last month as the central bank looked to help revive borrowing and stimulate flagging growth.

In the first two months of the year, the central bank spent close to $1 billion trying to weaken the peso after it had strengthened outside the limit of a trading band agreed with the International Monetary Fund.

Analysts see the peso weakening further to around 48 per dollar by the end of the year, with uncertainties about the elections likely to drag it down.

The peso’s weakness on Thursday helped push Latin American currencies to their lowest so far this year. ($1 = 41.1000 Argentine pesos)

Writing by Hugh Bronstein and Adam Jourdan; Editing by David Gregorio and James Dalgleish

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