How will an eventual rise in interest rates by the FED impact Peru?

The Federal Reserve (FED) of the United States left on Wednesday interest rate without changes, but announced that its increase will be decided in the short term in order to curb demand and contain inflation. It,

Mario Guerrero, deputy manager of Monetary Economy at Scotiabank, explained that the FED It would have already begun to withdraw its monetary stimuli since October of last year, reducing the pace of bond purchases. After this first signal, the increase in the rate was expected.

Thus, with what happened on Wednesday, what has changed is the expectation of when the increase will become effective. Until the end of last year, the hike was expected to happen in mid- to late 2022; however, with the acceleration of inflation in the United States that reached 7% in 2021,

Juan José Marthans, director of Economics at PAD of the University of Piura, pointed out that the FED will be prudent since an aggressive interest rate increase would be counterproductive if it is to avoid a slowdown in US economic activity.

Given this, says the economist, what . It is expected that this last indicator will not exceed 3.6% of the PBI this year.

Thus, what remains for the Government to do is open up its roadmap on the fiscal front and show its projections for the medium term, both for public debt and fiscal deficit. This, to analyze if they are viable for the period 2022-2026.

“If this were to happen, there should not be a major impact on the economic stability of the country, the perception of risk and the impact on the cost of financing and availability of the international front in favor of Peru”Marthans added.

effects

Guerrero pointed out that the FED You must have a firm and clear position that the interest rate increase will be relatively soon. This because

The expectations, says the Scotiabank representative, anticipate there will not be a single increase, but several throughout the year. This consolidates a scenario of rate increases both in soles and in dollars for loans and deposits during 2022.

So too, , so the movements of the green currency should be more moderate.

According to Ricardo Carrión, managing partner of Kallpa SAB, it could happen that some capital decides to migrate to U.S temporarily because their interest rates would become attractive to investors.

This situation would have consequences. According to Carrion, At the same time, that FED raise their rates, implies that for the Peru It will be more expensive to finance.

For Marthans, if setting the reference interest rate of Peru is not significant in the face of unforeseen increases in the US rate, there could be an outflow of capital and this would generate exchange rate volatility and affect the possibility of reducing inflation.

“Three elements must be considered for this adjustment: to be fine in the orientation of Peru’s monetary policy, not to be startled because the Peruvian fiscal position is good so we will not be significantly discriminated against on the international financial front, and we require new fiscal rules to reinforce the confidence of the international front”, He said.

The latter is a necessity that neither international financial organizations nor the international financial market must face, said Marthans.

Impact

For Carrión, the Peruvian economy has the capacity to absorb these effects because

“Central banks are normalizing and taking their monetary policies to a more neutral ground, since the economies are recovering”, he pointed.

Marthans do not consider that the Peru face a great impact because it has the necessary elements to cushion it. For example, in the face of major capital outflows, , he pointed out.

“However, the central issue, apart from the MEF clarifying the panorama of fiscal rules, is how to face the urgency of reactivating private investment in the country,” I note.