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 range today between 2.25 and 2.50 percent.
The Federal Reserve’s Monetary Policy Committee will begin trading on Tuesday and will issue its rulings on Wednesday. Market analysts expect interest rates to rise 75 basis points to between 2.5 and 3.25 percent.
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The monetary entity continued a strong rally in June, the largest since 1994, and did so again a month later. In total, since March of this year rates have increased four times. Its counterpart on the Old Continent, the European Central Bank, also raised interest rates sharply in September by 75 basis points.
Impact in Colombia
How will the new rate hike by the US Federal Reserve affect Colombia?
This step by step explains the following:
1. The increase in inflation in the US puts more pressure on the central bank of that country i.e. Federal Reserve (Fed), to raise interest rates.
2. By raising prices, The Fed seeks to limit consumption and investment So that prices do not continue to accelerate.
3. The Fed’s attempts to curb inflation through consumption and investment are raising fears that a 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 which can come from other economies like Colombia.
5. If US economic production is expected to slow, expect lower demand for raw materials.
6. If the demand for raw materials, such as oil, falls, their prices fall (as has already happened) and Colombia, which exports oil, will get less foreign currency for its sales.
7. If the entry of dollars into the country falls due to the fall in oil prices, the price of dollars rises because it is less abundant as it has already happened.
8. The influx of dollars due to rising interest rates in the United States 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 fight inflation, will also have to accelerate the rise of these rates, to continue to fight inflation, but also to prevent the outflow of dollars that Attracted by US rates.
10. In short, higher inflation in the United States can lead to lower incomes for Colombia due to lower oil prices, additional rises in the dollar, and additional increases in interest rates.
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