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U.S. Fed interest-rate hike to have limited impact on LatAm
Last Updated: 2017-03-17 08:21 | Xinhua
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The U.S. Federal Reserve's decision to raise benchmark interest rate by a quarter of a percentage point will have limited impact on Latin American economies.

Analysts in Brazil, Mexico and Argentina agree the impact will be minimal.

The increase, from 0.75 percent to one percent, "had its impact ... even before it happened," in part because "they were already expecting it," Alberto Pfeifer from the Institute for Higher Studies at the University of Sao Paulo (USP), told Xinhua in a recent interview.

While Brazil's Sao Paulo Stock Exchange and national currency both rebounded on the news, Pfeifer said that had more to do with "domestic matters" than "cause and effect."

"Certain doubts remain" about whether U.S. interest rates will continue to rise over the coming months, he said.

That decision would depend on the unemployment rate and, above all, fiscal reforms in the corporate sector, which both U.S. President Donald Trump and congressional House Speaker Paul Ryan are eager to implement to reduce the tax burden on corporations from 35 percent to 20 percent.

According to Pfeifer, if the interest rate remains on the rise, the medium-term "risk" for Brazil is that its large pension funds, which operate under strict regulations, "could migrate" to the U.S. market to take advantage of the increase.

Brazil could, of course, counter that trend "by deepening reforms" which the current government is undertaking.

"President Michel Temer, who has already said he will not run in 2018 elections, has the mission to do the dirty work of putting in place labor, tax and social security reforms, which market operators are expecting, but which will come at an electoral cost," said Pfeifer.

These reforms are "very attractive" and will "cement the foundations for economic growth" that will be felt during the next government, he said.

If Temer fulfills his reformist agenda, according to Pfeifer, the stock exchange index, currently at around 65,000 points, could reach 80,000 points by year's end.

"International markets are convinced that emerging economies are on the threshold of a new wave of growth, which perhaps won't be as evident as the first, and the first country they mention is Brazil," said Pfiefer.

Mexico's peso also rebounded somewhat on news of the Fed hike, closing at 19.55 pesos to the dollar.

CI Banco senior financial analyst James Salazar credited the currency's positive reaction to the fact that the hike signals the U.S. economy is doing well, which will in turn benefit Mexico's export sector.

"An economic improvement in the United States is also positive for Mexico, given the ties between their economic cycles. It benefits Mexican companies when the United States is doing well," said Salazar.

The Fed, he said, senses a more dynamic jobs market and an inflation rate that is close to the U.S.' target of two percent, encouraging signs for bilateral trade.

Last time the Fed raised the benchmark interest rate from 0.50 percent to 0.75 percent in December, the peso slid one percent against the dollar, mainly due to end-of-year jitters in Mexico that led to capital flight in search of better yields, something that didn't happen this time, he noted.

He also agreed with Pfiefer that the move was expected.

"At the end of the day, (the hike) sticks to the script, because Fed members still plan to raise the interest rate two more times in 2017, as they estimated in December, when they revealed their projections," said Salazar.

In Argentina, the hike was seen as a reminder that "the era of cheap money is over," the daily La Nacion said.

While the increase presents "no immediate risk to the country, it does make foreign financing more expensive," the daily noted, in an article that consulted Argentine analysts on Wall Street.

By raising the price of borrowing, "the rate hike does not imply a major risk for Argentina, but it does impose greater discipline," financial analyst Pillar Tavella, of Barclays, told the daily.

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