The Federal Reserve, the central bank of the United States, raised its benchmark interest rate once again on Wednesday. The rate was between 2.25 percent and 2.5 and the institution plans to continue this movement.
It did so a couple of weeks after it became known that inflation in the United States hit a new record and in June it was the highest since 1982 (9.1 percent), driven mainly by the rise in gasoline prices. And food.
(Also read: US inflation stands at 9.1% and breaks a new record in 40 years)
According to the United States Bureau of Labor Statistics (BLS), the increase in energy prices in the sixth month of 2022 was 7.5 percent in one month and contributed about half of the monthly increase, and in the specific case of gasoline, it became more expensive 11.2 percent in that last month.
But, what impact can the increase in Fed rates have on 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, which now remain between 2.25 and 2.5 percent.
2.- By raising its interest rate, the Fed seeks to curb consumption and investment so that prices do not continue to accelerate.
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3.- The Fed’s attempts to curb inflation, acting on consumption and investment, raise fears that the slowdown in economic activity will translate into a recession.
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 the economic production of the United States is expected to slow down, it is expected that there will be 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 may lead to lower revenues for Colombia due to lower oil prices, additional rises in the dollar and additional increases in interest rates.