An oft-repeated adage is that when the United States sneezes, Latin American economies catch a cold.
For Bancolombia’s economic researchers, the saying fits perfectly to describe the effects that the country will suffer following the increase in interest rates established yesterday by the Federal Reserve (FED). “This time our country is susceptible to developing pneumonia,” they warned.
And it is that the Federal Reserve of the United States (FED) increased its interest rates to the range of 0.25% and 0.50%, in which it constitutes the first increase of at least 7 that it would apply this year, with the goal of fighting runaway inflation, which in February was 7.9%, the highest record for consumer prices in that country since the beginning of 1982.
Determination
For economic analysts, changes in the orientation of monetary policy in developed countries are transmitted directly to other economies, and in this case the Colombian economy will not be the exception.
The EFE agency reported that following two days of meetings, the FED Board of Governors cited in a statement that the Russian invasion of Ukraine is causing “tremendous human and economic damage”, and that this conflict is contributing to prices rising. even more.
He also stressed that the FED’s decision was not unanimous, as is customary in this organization, but that one of the regional governors, James Bullard of Saint Louis (Missouri), stood out and voted once morest being in favor of an increase even more aggressive, half a point (0.50%).
For its part, the AFP agency recalled that the FED had cut its reference interest rate to zero in March 2020 to sustain the economy, consumption and investment, in the face of the coronavirus pandemic.
The head of the FED, Jerome Powell, said that the body will seek to control inflation, without affecting economic growth. The market, in turn, expects the rate to stand at 1.75% at the end of this year, assuming increases of a quarter of a point (0.25%) at each FED monetary policy meeting.
The effects
After the FED interest rate increase, the first since 2018, other experts in Colombia explained some of the impacts of this determination on the national economy.
“For Colombia, this decision will have implications in the cost of access to external credit and in the levels of internal interest rates due to the high participation of foreign investors in the local debt and foreign exchange markets,” noted Silvia Mera, an analyst at Housing.
And it is that this adjustment by the US central bank is interpreted as the first step in making credit more expensive, and a possible lower flow of its liquidity operations with other central banks.
From the perspective of Bancolombia analysts, this move will be transmitted to our economy through the financial channel, either through the change in the direction of capital flows, the increase in the return required by investors or the reduction in the amount of financing that the rest of the world is willing to provide us with.
“In our case, the foregoing is critical, since the large current account deficit that Colombia exhibits generates considerable needs for external funding,” Bancolombia experts specified, who warned of possible depreciation of the public debt, increases in the risk and depreciation of the peso once morest the dollar.
On the other hand, the public debt and the Colombian risk premium are vulnerable to a reduction in the size of the balance sheet (or asset portfolio) of both the Fed and the European Central Bank (ECB).
In many of the emerging countries, Colombia is the only one in which sovereign fixed income, both in pesos and in dollars, is significantly sensitive to changes in the size of the assets of the world’s two main central banks (see To know more).
At this point, it is worth noting that due to the pandemic, two years ago, the FED launched an asset purchase plan, that is, treasury bonds and mortgage securitizations (known in English as Mortgage Back Securities or MBS), to accelerate the decline in long-term interest rates.
With the decision adopted yesterday by the FED, added to the moderation in the supply of liquidity to the markets caused by a slower rate of acquisition of securities by them, it would translate into devaluations of Treasury Bonds (TES) and an increase in the country risk premium.
Other factors once morest Colombia is the fact that the sovereign rating has been downgraded by risk assessors such as S&P and Fitch to speculative grade, and the pace of adjustment of Colombian public finances has been slower than that of its peers, while the deficit balance of the current account is one of the largest in the developing world.
Analysts concluded that monetary policy decisions such as those adopted by the FED and those taken in other latitudes will represent a major challenge for the Colombian economy.
1,75%
FED interest rate at the end of this 2022, according to market estimates.
