This Wednesday, the US central bank, the Federal Reserve (Fed), announced an interest rate hike of 0.75%, which places interest rates in a range of 1.5% and 1.75%. Markets in Latin America reacted positively, with the currencies of Chile, Brazil and Mexico appreciating against the dollar. In Colombia, the momentum deepened an appreciation that started this morning. This has to do, analysts point out, with the fact that the markets had prepared themselves for an even more restrictive policy or hawkish.
Fed Chairman Jerome Powell’s message was peppered with optimism. During his speech and question-and-answer session with reporters in Washington, Powell assured that a “soft landing” in the US economy was still possible, allaying fears that a recession is inevitable. This is the highest rate hike the Fed has taken since 1994 and is due to persistent inflation in the US economy caused by the war in Ukraine, supply chain disruptions and an imbalance in the labor market.
The markets were expecting a more aggressive policy, explains Gabriela Siller, director of economic analysis at Banco Base, which is why currencies such as the Mexican peso reacted positively. “The rise expectation for the rest of the year was less aggressive than expected,” says the specialist. “So, with this, the dollar weakened and the Mexican peso appreciated towards levels of 20.55 pesos per dollar”, she adds. According to data from Bloombergthe peso appreciated 1.6% against the dollar on Wednesday.
“The Fed statement and Powell’s press conference was less hawk than expected”, says Jessica Roldán, director of economic analysis at Finamex. The market was already expecting several increases of 0.75% in the year, explains Roldán, “but Powell saying that today’s movement is extraordinary and that they do not consider that it will be common in the future put a brake on those expectations.” ”.
A rise in interest rates in the US makes its financial instruments, such as government debt, much more attractive to investors who have been investing in emerging markets for years due to a lack of returns in developed countries. So far, the rate of return differential offered by Latin American economies remains very high, so the region has not seen a large enough capital outflow to destabilize the financial system. Central banks in the region have started their own rate hike cycles since last year and are expected to continue to hike.
In the medium and long term, a rise in global rates will boost the financing costs of emerging economies, limiting the ability of companies and governments to borrow.
In Latin America, the markets had already assimilated a hike by the Fed, as the decision was highly anticipated.