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This is How the U.S. Fed’s Rate Hike Could Affect Argentina

The U.S. Federal Reserve (FED) raised interest rates by 0.25 percentage points on Wednesday. The hike puts it in the range of 5-5.25%, the highest in 16 years. 

This is the tenth consecutive hike the agency has made since March 2022 in response to the need to combat a post-pandemic inflationary trend. However, it has indicated that it could pause its aggressive policy to evaluate the scenario and decide how to continue. That decision has consequences for countries across the world, including Argentina and local financial assets, because it affects the cost of money and the direction of capital flows.

Economist Federico Glustein pointed out that a 0.25% rate hike is related to the US monetary contraction process. Camilo Tiscornia, director of CyT Asesores Económicos, said that “what the Federal Reserve decided is in line with expectations”. He pointed out that, although they raised the rate again, the statement gives reason to believe they won’t pursue an aggressive policy going forward.

“A scenario of certain moderation in the Fed’s actions is being confirmed,” said Glustein. But he anticipates that this new increase will mean a decrease in global liquidity volumes, which will also drive a downward trend in financial assets. This is a result of the “flight to quality”: that is, a flight of capital towards US treasury bonds and an exit from riskier assets.

In Glustein’s words, “this will lead capital to migrate to the United States as a consequence of the security and profitability with low volatility that no other market offers, especially considering that inflation is effectively decreasing”.

Inflation “remains high”

Likewise, this increase in the cost of money implied by the rise in interest rates translates into a recessionary conditioning factor for economic activity, since credit is tightened and investment is discouraged. He warns that the horizon should be evaluated, since the possibility of a recession could complicate the outlook.

The agency’s communiqué points out that inter-annual inflation “remains high” (given that it was 5% in March and the aim is to reach 2%) and employment continues to “grow at a robust pace”, but adds that it must analyze the consequences of recent bank failures in the US after the collapse of Silicon Valley Bank, and closely follow the course of inflation and financial markets over the coming months. The dynamics of these variables will be key to what happens to the U.S. economy.

Glustein believes that “Argentine assets traded abroad could have a correction in the event of a recessionary scenario, while, if that does not happen, they could have a moment of relief”. Furthermore, he considers that what happens with local stocks depends more on the local context, while Argentine bonds play in tune with our macroeconomy.

Tiscornia explains that “the strengthening of the dollar last year and the flow of capital to the US did not suit Argentina at all”. However, this has been reversed in recent months, and the prospect of the Federal Reserve not raising the interest rate as much helps.

Is the bullish cycle easing?

Since the US is reaching the peak of the rate hike, it is expected that “the next Argentine government can count on low interest rates” for any debt negotiation or attempt to attract capital, according to Tiscornia. This is a plus, since Argentina will have to renegotiate several debt maturities in dollars in 2024.

Likewise, some believe an eventual stabilization of rates in the United States could constitute a bonus for Argentine assets, because it may imply a return of capital to emerging markets.

However, for the chief economist of Delphos Investments, Jorge Neyro, “the impact of the rate hike in the United States in financial matters is minor in the short term for Argentina because it is outside the international market.” He believes the trajectory of assets in the local market will depend on how the words of Jerome Powell, president of the FED, are interpreted. 

“If the market considers that the bullish cycle is slowing down, it may be taken with some relief by investors,” he said. “That will be a good sign.”

Source : Buenosairesherald