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By Dave Graham and Nicolás Misculin
NEW YORK/BUENOS AIRES, Sept 26 (Reuters) - The International Monetary Fund on Wednesday increased its three-year lending program with Argentina by $7 billion to $57 billion, on the condition that the central bank halted full-scale interventions to support the ailing peso.
IMF Managing Director Christine Lagarde, speaking at a news conference in New York alongside Argentine Economy Minister Nicolas Dujovne, said the Fund was “significantly frontloading” disbursements under the program. It will boost the financing available through the end of next year by $19 billion, she said.
Argentina has been at the center of emerging market turmoil this year after a drought plunged Latin America’s third-largest economy into recession.
Investor fears that Argentina would not be able to service its foreign debt in 2019 have made the peso one of the world’s worst performing currencies this year. It has lost more than 50 percent of its value in 2018.
Lagarde said that Argentina’s central bank had agreed as part of the deal to allow the peso currency to float freely and would only intervene in the foreign exchange market in extreme circumstances.
The central bank has spent nearly $16 billion in reserves this year in a failed attempt to prop up the peso, using a large share of the dollars disbursed by the IMF so far.
“In the event of extreme overshooting of the exchange rate the central bank may conduct a limited intervention to prevent disorderly market conditions,” Lagarde told reporters.
Subject to IMF board approval, financing under the new deal would no longer be discretionary, but would be readily available to the government for budget support, she said.
Speaking at a later news conference in Buenos Aires, Argentina’s new central bank governor, Guido Sandleris, said the bank would establish a trading band for the peso and only intervene in the market if it fell outside that range.
Sandleris, appointed on Tuesday after his predecessor unexpectedly resigned, said the range will initially be set at 34 to 44 pesos to the U.S. dollar. It will depreciate daily at a rate equivalent to 3.0 percent per month, he said.
Any intervention in the market outside that range would be capped at $150 million a day, Sandleris said, far less than the bank spent on many days in recent months.
The peso closed at 38.5 to the U.S. dollar on Wednesday.
In a far-reaching overhaul of monetary policy, Sandleris also said the central bank would abandon its inflation target of 27 percent for this year and instead set an objective of limiting money supply. The bank will target zero growth in the monetary base from now until June 2019, he said.
The central bank has already hiked benchmark interest rates to 60 percent in an effort to curb inflation, which is now predicted to top 40 percent this year.
However, with credit accounting for a small share of economic activity in Argentina after decades of financial crises, interest rates have a limited impact on price rises.
“At this time, Argentina needs a simple anchor. Our anchor will be a very strict control of the amount of money in the economy,” Sandleris said, adding that it would require months for the new policies to have an impact on prices.
But the monetary base has been growing at a brisk 2 percent a month and the policy could have a negative economic impact, said Santiago Lopez Alfaro, an economist and associate at Delphos Investments.
“That is very restrictive in an economy that is in recession and with high rates, with economic activity hit hard,” he said.
Reporting by Dave Graham in New York, additional reporting by Daniel Flynn, Scott Squires, Nicolas Misculin and Gabriel Burin in Buenos Aires; Writing by Daniel Flynn; editing by Clive McKeef and Rosalba O'Brien