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Rates: how much would they rise in the US and what is their impact in Colombia – Financial Sector – Economy

In order to control inflation, the Federal Reservethe central bank of the United States, is ready to raise interest rates again at its meeting this week, which today are between 2.25 and 2.50 percent.

The Fed’s monetary policy committee will begin deliberating on Tuesday and will release its rulings on Wednesday. Market analysts expect rates to rise 75 basis points to between 2.5 and 3.25 percent.

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The monetary entity proceeded to a strong rise in June, the largest since 1994, and did so again a month later. In total, since March this year rates have risen four times. Its counterpart on the Old Continent, the European Central Bank, also raised rates sharply in September by 75 basis points.

Impact in Colombia

How would a new rise in interest rates by the United States Federal Reserve impact Colombia?

This step by step explains:

1. The increase in inflation in the United States puts more pressure on the central bank of that country, the Federal Reserve (Fed), to raise interest rates.

2. By raising rates, the Fed seeks to curb consumption and investment so that prices do not continue to accelerate.

3. The Fed’s attempts to curb inflation by acting on consumption and investment raise fears that the slowdown in economic activity will translate into a recession.

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4. The increase in interest rates in the United States attracts capital to that country that can come from other economies such as Colombia.

5. If US economic output is expected to slow, expect less demand for raw materials.

6. If the demand for raw materials, such as oil, falls, their prices fall (as has already been happening) and Colombia, which exports oil, would receive less foreign exchange for its sales.

7. If the entry of dollars into the country is reduced due to lower oil prices, the price of dollars rises as they are less abundant, as has already been happening.

8. The outflow of dollars due to the higher interest rate in the United States also puts upward pressure on the dollar in Colombia.

9. Colombia, whose issuing bank (Banco de la República) has been raising its own interest rate since before the Fed to combat inflation, would also have to accelerate the rise in those rates, to continue fighting inflation, but also to prevent the outflow of dollars attracted by US rates.

10. In short, higher inflation in the United States could lead to lower income for Colombia due to lower oil prices, additional rises in the dollar and additional increases in interest rates.

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