BUENOS AIRES, Dec 5 (Reuters) - Argentina's central bank on Wednesday removed the 60 percent floor on its benchmark interest rate, paving the way for it to reduce one of the highest rates in the world, which has choked off growth, contributing to a recession in Latin America's third-biggest economy.
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The country's peso currency weakened by 2.08 percent to 38.20 per U.S. dollar on the bank's announcement, traders said.
Economists maintained their estimate for year-end inflation in Argentina, which is expected to reach 47.5 percent in 2018, a central bank poll showed on Tuesday.
The International Monetary Fund, which signed a $56.3 billion financing deal with Argentina in September, welcomed the announcement, saying the government's new monetary policy was yielding results.
The central bank hiked its benchmark policy rate to 60 percent in August after the peso was repeatedly devalued. It has lost around half its value so far this year.
Argentina's skyscraping interest rates have slowed economic growth, and economists predict contractions of 2.4 percent in 2018 and 1.2 percent in 2019, the poll of economists showed.
"If the rate does not begin to fall, the economy will not jump start," said Horacio Larghi, an analyst at Argentine firm Invenomica, who added that breaking the 60 percent barrier will "change investor expectations."
In addition, the central bank tightened its foreign exchange trading band to 2 percent from 3 percent, beginning in 2019.
The central bank's decision to lift the interest rate floor will slacken Argentina's tight monetary policy, implemented after the country secured the IMF bailout.
The monetary policy, spearheaded by central bank President Guido Sandleris, established a floating exchange rate band for the peso and introduced measures to control inflation by limiting growth in the country's monetary base. The policy has largely stabilized the peso.
Argentina has also turned to China as another source of financing, and finalized an agreement on Sunday to extend a currency swap deal between the two countries for a total $18.9 billion credit line.
(Reporting by Walter Bianchi and Scott Squires Writing by Cassandra Garrison Editing by Ross Colvin and Paul Simao)