This Wednesday, the US Federal Reserve (Fed) announced a 0.75% rate hike, bringing rates to 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 began this morning. Analysts point out that this has to do with the fact that the markets had adjusted to even tighter or more restrictive policies.
Fed Chair 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 and allayed fears that a recession was inevitable. This is the highest rate hike the Fed has made 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.
Markets expected more aggressive policies, explains Gabriela Siller, head of economic analysis at Banco Base, which is why currencies like the Mexican peso reacted positively. “The increase expectation for the rest of the year was less aggressive than expected,” says the specialist. “With that, the dollar weakened and the Mexican peso rose to a level of 20.55 pesos per dollar,” he adds. The peso appreciated 1.6% against the dollar on Wednesday, according to Bloomberg data.
“The Fed’s statement and Powell’s press conference were less hawkish than expected,” said Jessica Roldán, director of economic analysis at Finamex. The market has already been anticipating multiple gains of 0.75% throughout the year, Roldán explains, “but Powell’s statement that today’s move is exceptional and that they don’t think it will be common in the future reflects those expectations.” braked.” ”.
A rise in interest rates in the US makes its financial instruments, such as government bonds, much more attractive to investors who have invested in emerging markets for years due to the lack of yields in developed countries. So far, the yield differentials of Latin American economies remain very high, so the region has not experienced large enough capital outflows to destabilize the financial system. Central banks in the region have been embarking on their own rate hike cycles since last year and are expected to keep going higher.
In the medium and long term, a rise in global interest rates will drive up financing costs in emerging markets and constrain corporate and government borrowing.
In Latin America, markets had already digested a Fed rate hike as the decision was eagerly awaited.