Fed would continue with high interest rates: how does it affect the Peruvian economy?

Jerome Powell, president of the Federal Reserve (FED), affirmed that they will keep the reference rates high to combat inflation in the United States. The institution will continue with its restrictive policy, which considers a possible increase if necessary.

“We are prepared to raise rates further if appropriate and intend to keep policy tight until we are confident that inflation is sustainably declining toward our target,” Powell said last Friday during a speech at the forum of Jackson Hole, Wyoming.

By June, the Fed halted rate increases after 10 consecutive hikes. However, for July there was an increase of 0.25 points to a range between 5.25 and 5.5%, reaching its highest level in 22 years. It should be noted that core inflation in the US peaked at 5.4% in February 2022, gradually declining to 4.3% in July, still far from the 2% target. What would a possible rate hike mean for Peru?

Could the exchange rate be affected?

When the United States increases its interest rates, it becomes a reversal point for many countries. This generates a search for dollars and, as a result, strengthens the currency and bolsters the US economy.

“When the dollar is attractive, circumstantially it can mean a small rise in the exchange rate. ANDeventually, there is a reason for the dollar to rise a little (in Peru), but we are talking about a rate hike that has been going on for several months. So, the increases in foreign currency would be marginal”, economist Enrique Díaz told La República.

What will happen to the reference rates in Peru?

Adrián Armas, manager of Economic Studies of the Central Reserve Bank (BCR), confirmed that it is considering maintaining the reference interest rates at 7.75% or starting a cycle of reductions. In addition, in the last communiqué of the BCRP monetary program, the sentence warning of the possibility of a new rise in the reference rate was withdrawn.

“Until recently, the inflation analysis, on which the technical decision is based, was to raise or maintain it (the reference rate). Today, it is rather between maintaining it or eventually beginning the cycle of casualties” Armas explained on Thursday, August 24, during the XI Congress of Business Families and Wealth Management, organized by El Dorado Investment.

In this scenario, according to the specialist, an eventual rate hike in the US by the FED could only imply a “change in the speed of adjustment” of the BCRP. In other words, the body could delay the decision to start the reduction season.

However, in favor of the Peruvian economy, the BCRP also estimates that inflation in Peru will continue to decline in the following months, standing at 3.3% at the end of the year, and by 2024 it could return to the target range of between 1 and 3%. %. ANDThis situation would favor the decision to start reducing rates.