How rising US interest rates affect Argentina

On Thursday it was learned that inflation in the US remains stable at above 8% per annum with an average price increase of 1% in May. That day the financial market got rid of the prediction that the Federal Reserve insisted on raising its monetary policy interest rate by half a point (0.50%) and consensus moved towards 0.75%, such the adjustment that was announced a few moments ago.

This tightening means that the Federal Reserve would accept cause a cooling of the US economy. in exchange for a faster reduction in inflation from levels never seen in the past 40 years. Jerome Powell said moments ago that he expects inflation throughout 2022 they drop to 5% – today it is 8.5% – and the fall is accentuated from 2023. Powell’s struggle today is to get the market to believe him.

Ultimately, the Fed strengthened so as not to lose credibility before the markets. The result of this examination will be seen from now on. A quick answer was given by Wall Street: just yesterday, after learning of the rate hike, and listening to Powell, the indicators favored their recoveryafter five consecutive days of down.

For Argentina, what impact does all this have?

Since the country is outside the dollar debt market, the Fed’s changes do not affect it specifically in terms of funding. Yes, the outlook for private companies that maintain debt market access can become more difficult.

The Argentine government will tackle dollar debt markets mid 2024, when you have to pay the first amortization installment of some swap bonds. It is possible that at that point the cost of accessing the market – if it happens – will be more expensive.

But the impact on Argentina will be felt through what this Fed monetary tightening will affect the rest of the world, which is very well integrated into global financial markets.. For example, Brazil. If the cost of financing Brazilian companies becomes more expensive, it will affect their business and therefore these companies’ demand for goods and services they import from Argentina.

“There will be an impact, but it will depend on how it affects our business partners.” stressed the economist Andres Borenstein.

Another thing to keep in mind: at higher rates, the dollar strengthens. An example: at the beginning of the year, one euro was worth 1.2 dollars. Today one euro is equivalent to only 1.04 dollars.

Historically, if that happens raw materials tend to decrease Price. But today that logic is altered by the war in Ukraine and strong demand from China.

But looking ahead, Argentina has its problems. Today it is going through a deep crisis, wasting the wind in its tail. with headwinds, the setting is a little darker.