Impact of the First Interest Rate Cut in the U.S. in Four Years on Latin America

After a long wait, the Federal Reserve of the U.S. announced the first interest rate cut in four years, lowering rates by 0.5%. Rates now range from 4.75% to 5%. This move, considered bold by analysts, comes in a context where inflation has stabilized, decreasing from 9.1% to 2.5% since 2022.

The decision aims to relieve consumers and small businesses facing high debt costs, making it easier to obtain loans for car purchases or mortgages. Additionally, it is expected to encourage businesses to invest and create more jobs, thereby boosting economic growth.

Effects on Latin America from the U.S. Interest Rate Cut

The actions of the Federal Reserve have a significant global impact, especially in Latin America, where economies largely depend on their relationship with the U.S. Gabriela Siller, director of Economic Analysis at Banco Base in Mexico, highlights that 40% of Mexico's GDP comes from exports, 80% of which are directed to the U.S. Therefore, any change in the U.S. economy directly affects Mexico and other Latin American nations.

Siller mentions that the rate cut improves expectations in the labor market, the flow of remittances, and exports. Benjamin Gedan, director of the Latin America Program at the Wilson Center, explains that lower rates are well-received in the region, which has seen a significant increase in debt in recent years. This has diverted resources from crucial sectors like health and education.

With the Fed's decision, it is anticipated that central banks in the region will have more room to cut their own rates and face new challenges, which is necessary after years of economic stagnation.

Capital Movements

The rate cut could also positively impact commodity prices, benefiting South American economies. Moreover, company valuations on the stock market could rise, spurring an economic revival.

Elijah Oliveros-Rosen, chief economist for emerging markets at S&P Global Ratings, emphasizes that lower rates in the U.S. encourage capital flow into emerging markets in search of higher yields. However, the perceived risks for growth in Latin America may discourage foreign investment.

This cut is expected to mark the beginning of a series of reductions in the cost of credit throughout the remainder of 2024 and into next year, which could have a lasting impact on the region's economy.

Source: BBC.