FED rate hike will not severely impact the Peruvian economy

The long-announced and long-awaited rise in the benchmark interest rate of the Federal Reserve from United States this last March 16 was finalized, after several delays. In this way, the Federal Open Market Committee (FOMC) of the US central bank decided to increase the reference operation percentage by a quarter of a point to bring it to 0.25%-0.50%; and thus combat annualized inflation of 7.9%, the highest since 1982.

“Expectations remain that inflation will drop in the second half of the year,” said Jerome Powell, chairman of the Federal Reserve, anticipating that the high consumer price index will remain high until June, and that he expects it to fall month to month

It should be noted that this is the first increase since 2018, after the FED decided to keep borrowing costs close to zero for two years to protect the economy from the pandemic.

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The decision has generated reactions for and against the measure; since the impact on emerging economies, such as Peru, would not be as devastating as expected. Specialists consulted by The Republic explain the consequences of the American measure for our country.

There will be no immediate effect

For the former director of the Central Reserve Bank of Peru, Juan José Marthans, the North American reference adjustment “still will not be felt by the Peruvian economy” neither in the flow of capital nor in the dollar exchange ratedue to the work done by the Central Reserve Bank of Peru (BCRP) having increased its reference percentages long before the FED.

“We should not expect an impact from the reference interest rate, Peru has already raised its rate to 4%; 0.25% is nothing compared to what could arise in terms of capital flow impact. In the short term, we should not observe greater volatility in the strong exchange rate in Peru, “said the also professor.

During his meeting with the media, the head of the FED He stressed that “the US economy is very strong and well positioned to handle tighter monetary policy.”

César Romero, head of Research at Renta 4 SAB, highlighted the tone of Powell’s speech, since the increase in basis points was what the market had expected.

“It has been a calm message, that is why we hope that the impact on the Latin American economy will not be strong. We could have seen the shock in the dollar, but it fell, then. Let us remember that the impact of a rate hike, in the end, what it will do is make loans in dollars more expensive, that is the direct effect”, the expert highlighted.

Alert with the increase in rates

The Fed warned that inflation in 2022 will be 4.3%, which implies that it will take “longer” than expected to bring it to the 2% target.

Romero and Marthans agree that the US abstention from raising benchmark rates had much to do with the Federal Reserve’s underestimation of inflation.

“They had the idea that inflation would be transitory, so they believed that it was going to go down at some point, but it has had exogenous factors that have nothing to do with the American economy, such as the start of the war,” Romero said.

Along these lines, the Renta 4 specialist predicted the probability that this would be the first increase of a total of seven of 25 basic points (including the one on March 16), since the Fed commented that “it anticipates that the continuous increases in the target range will be appropriate.”

Marthans, for his part, stressed that the upward forecasts for the reference rate are also subject to uncertainty due to the war in Ukraine that would put extra pressure on inflation.

“If the conflict tends to last longer, then the adjustments that we are seeing in the US interest rate could fall short. You have to be attentive to the periodic frequency with which it is adjusted in the basic points”, said the former president of the Superintendence of Banking and Insurance (SBS) when also referring that it will depend on how the BCRP responds to the progressive increase in the North American rate.

In relation to this, Romero recalled that the country has a “fairly strong” fiscal base; furthermore, that Peru’s indebtedness over GDP is 35% and “it will allow it to withstand this type of movement.”

The fed will now have to grapple with the task of ensuring a soft landing for the US as well as the world, but our required specialists warned that a quick change in basis points (0.50%) could rattle the markets and lead the economy into recession, especially in the midst of the war between Russia and Ukraine.

“Being aggressive with the interest rate in a warlike context at Russia and Ukraine level can be extremely delicate, because there is already pressure on economic activity as a result of the energy and supply crisis that is generated in the context of the war. This could intensify and end up with the entire globe and the emerging countries in a possible recession. We should be more concerned about the effect of the war”, said Marthans.