Argentina central bank jolts key rate to 40 percent, peso strengthens

By Hugh Bronstein and Nicolás Misculin

BUENOS AIRES (Reuters) - Argentina's government and central bank jolted the country's battered currency back to life on Friday with a set of announcements intended to restore confidence in the president's ability to deliver sustainable growth while cutting inflation.

The central bank sharply raised its monetary policy rate to 40 percent, sparking a 4.78 percent jump in the local peso while the government cut its fiscal deficit target to 2.7 percent of gross domestic product (GDP).

The moves followed a week of dramatic weakening in the peso, which sank 7.83 percent just on Thursday to 23 per U.S. dollar. After the announcements on Friday morning, the currency strengthened to 21.95 to the greenback.

The bank said in a statement it would keep using all tools at its disposal in its effort to reach the country's 15 percent inflation target for this year.

Treasury Minister Nicolas Dujovne told reporters the government stood by the 15 percent target and supported the central bank's efforts.

The bank has increased the key rate three times - on April 27, then on Thursday and again on Friday, yanking it up from 27.25 percent.

Private economists and investors have complained about the slow pace of progress in narrowing the primary fiscal deficit, which does not include interest payments on debt.

The target had been 3.2 percent of GDP before Dujovne tightened it to 2.7 percent.

Speaking about the 0.5 percentage point cut in the deficit target, Dujovne said " ... part of the cut comes from greater than expected resources at our disposal, because tax collection is evolving better."

The rest will come from an increased effort at generating savings, he added.

"We have systematically hit our fiscal targets," Dujovne said. "Argentina will maintain the economic growth that started a year ago and continue to create jobs and lower poverty."

The government has adopted policies aimed at spurring economic growth ahead of President Mauricio Macri's expected 2019 re-election bid. The perception of political pressure on the bank to grease economic activity by keeping the money tap open had cast doubt on its willingness to raise interest rates.

The rapid-fire rate hikes appeared to dispel those doubts.

STUBBORN INFLATION

But a black cloud continued to hang over Latin America's No. 3 economy in the form of one of the highest inflation rates in the world.

Consumer prices in Argentina rose 2.3 percent

in March, putting the 12-month inflation rate at 25.4 percent.

Some economists urged the government to abandon its 15-percent inflation target for this year, saying it is unrealistic.

The markets have given Macri the benefit of the doubt for more than two years after taking power in late 2015.

He has ditched the previous government's foreign exchange and trade controls and helped the farm sector by cutting grains export taxes. Macri has also brought the country back into the international capital markets by settling protracted lawsuits brought by the holders of defaulted sovereign bonds.

Macri promised to "normalize" the long-troubled Argentine economy. Confidence lasted until interest rates started climbing internationally and the government, looking for money to help narrow the deficit, slapped a new tax on international investors last week. That's when the peso started its recent sell-off.

(Additional reporting by Juliana Castilla, Caroline Stauffer, Eliana Raszewski and Walter Bianshi; Editing by Chizu Nomiyama and Jeffrey Benkoe)