With many central banks offering interest rates at or near record lows, traditional savers with money on deposit in commercial banks are having a torrid time with returns on investment frequently well below inflation, making them poorer and not richer the longer they save. So how does a headline central bank rate of 40% sound?
If you were to invest your savings in Argentina, the central bank has just pushed its rate up to 40%; the third rise in the past eight days, seeing it rise from 27.25%. The move is intended to support the value of the Argentinian Peso which has seen its value drop by a quarter over the last year. Currently, the US Dollar is buying 21.94 Pesos; it started the year at 18.6 Pesos; it was at 15.8 Pesos in January 2017; between June 2008 and August 2013, it slowly rose from 3.06 to 5.6 Pesos. The rapid depreciation of the Peso got going in earnest in December 2015 when it had risen to 9.7 Pesos to the Dollar, by the following March, it was at 15.66 Pesos. Until the financial crisis of 2001-02, the Peso was pegged at parity with the Dollar.
If you like to gamble, there is a differential of 15% between potential interest (central bank rate, not commercial) and depreciation of the currency. If you take the view that the worst has passed, that may be tempting. Inflation in Argentina is also dizzyingly high coming in at 25.6% in March 2018. The average figure comes in at a shade under 200% (1944-2018, low -7% (1954), high 20263 March 1990). The central bank has set a target inflation rate of 15%; theoretically, boosting the interest rate should curb inflation and boost the value of the currency.
The turmoil in Argentina is due to the imposition of overdue market reforms aimed at ending protectionism and reducing government spending being led by President Mauricio Marci, a move applauded by international investors. Marci has ended capital controls and acted to re-establish the credibility of national economic data. His plans to remove subsidies on controlled price commodities including utilities and energy face stiff political opposition.