BUENOS AIRES, Feb 17 (Reuters) - Argentina's central bank raised the benchmark interest rate 250 basis points to 42.5% on Thursday, the biggest hike since 2019 as the South American country battles to bring down sky-high inflation that hurts savings and salaries.
The bank lifted the rate 200 basis points to 40% in January after holding it steady for over a year despite spiraling prices that the government has struggled to get in check. Inflation is running at over 50% on an annual basis, hitting savings.
The hike comes amid other tightening cycles around the region including in Peru, Chile and Brazil, and with inflation in focus in talks with the International Monetary Fund (IMF) to refinance over $40 billion in debt.
"The strategy is being adjusted in order to establish a policy interest rate path moving towards positive real returns on investments in local currency and to preserve monetary and foreign exchange stability," the central bank said.
The hike was the biggest since late August 2019 when the bank raised the rate above 80% in a bid to tackle inflation.
The bank added it would also create a 180-day Liquidity Note (Notaliq) to absorb liquidity, which would have a variable rate, equivalent to the effective annual yield of the 28-day Leliq.
Argentina is negotiating to iron out details of an agreement with the IMF to revamp debts the grains-producing country cannot pay. Terms of that deal are expected to include plans to bring down inflation and to move towards real positive interest rates.
The country's savers, wary of inflation and devaluation, have for years looked to convert savings into dollars. Capital controls have also created hot demand for currency black markets where dollars are twice as expensive as the official rate.
(Reporting by Jorge Otaola; Writing by Adam Jourdan; Editing by David Gregorio, Chizu Nomiyama and Sandra Maler)
