How does rising interest rates in the US affect Brazil?
Why does the increase in interest rates in the US affect Brazil?
Announcements
The increase in interest rates in the US affects Brazil. In fact, it has consequences for the entire world.
In fact, the Fed's (Federal Reserve, the United States' central bank) signal regarding the increase in interest rates has left many countries worried.
The fact is that the US is the largest economy on the planet. In other words, everything that happens there has consequences around the world.
In Brazil, the increase affects investments and the dollar exchange rate. Due to the country's current economic situation and the uncertainties surrounding the presidential election, the impacts could be even greater.
Therefore, in this article, we will better understand how interest rates work in the United States and the impact they have on the global and Brazilian economy.
Let's go?
What is the FED's decision regarding the interest rate hike?
On January 26, 2022, the Federal Open Market Committee of the Federal Reserve, the US central bank, decided to maintain the interest rate between 0% and 0.25%.
However, everything indicates that in March, the interest rate will increase.
The monetary committee says that because inflation is well above 2%, it will be necessary to raise the level of reference rates.
It is important to mention that many economists, since last year, have been saying that 2022 would be a year of inflation and high interest rates.
All of this will have an impact on the global economy.
What is the US interest rate?
The United States, like any other country, needs to raise funds to keep the nation running, pay the bills, etc.
There are several ways to do this. One of the most common is through the issuance of government bonds.
Anyone who buys a bond is basically lending money. The goal is to receive income in return.
Since US government bonds are considered an extremely safe investment, they offer a low yield.
Because of the 2008 crisis, the American government decided to launch a program to stimulate the country's economy.
One of the ways found to make this happen was by reducing the interest rate to 0%. In this way, it became possible to offer cheap credit to the country's population.
But since government bonds were yielding practically nothing, people began to lose interest in these securities.
For this reason, many investors started looking for other, more profitable options.
In 2017, the interest rate in the United States rose again. In March 2019, it reached 2.5%.
If you invests in the Treasury Direct, Here in Brazil, you are also lending your money to the government. With the increase in the Selic rate, some types of investments in Tesouro Direto have become more advantageous.
How is the interest rate in the US set?
The interest rate in the US is determined by three forces:
• Federal Reserve (FED)
• Investor demand for U.S. notes and bonds
• Banking sector, which offers rates and financing
Who sets the interest rate in the US?
The Federal Reserve (FED), which corresponds to the Central Bank of the United States, is the American institution responsible for supervising the banking system in the country.
And it is a Fed committee, known as the FOMC, that determines the interest rate and the main directions of monetary policy in the United States.
Why does the interest rate in the US affect Brazil?
The market expects interest rates to rise in the US as a way to contain inflation.
Brazilian investors are concerned about the pace of monetary tightening that will be imposed by the Fed and the effects that this will have on our country's economy.
When the Fed raises interest rates in the US, investments in government bonds become more profitable.
And foreign investors who wish to invest in Brazil have to convert dollars into reais (a weaker currency).
Furthermore, the country's economy is going through a complicated and unstable period, which increases risks and concerns among investors.
In other words, for it to be truly advantageous to invest in Brazil, the difference between the profitability of a safe investment in the US and a risky one in our country would have to be high, right?
And since expectations for economic growth are low and risks are high, some foreign investors, for security reasons, prefer to take their money out of here.
This could cause economic growth in Brazil to become even slower.
What are the causes of the impact of rising interest rates in the US?
The dollar is the most important currency in the world.
Furthermore, treasury bonds in the United States are credible, as they are considered extremely safe.
Therefore, any increase in the US interest rate makes this investment very interesting. And often, money leaves emerging economies (such as Brazil) for investments in the US.
In fact, this increase did not only have an impact on Brazil, but also on other countries.
In early January, with the release of the Fed minutes, European stocks have retreated from record highs.
Is it possible to invest according to US interest rates?
You can invest in investment funds that have assets abroad or in ETFs (Exchange Traded Funds).
Basically, ETFs are investment funds that are referenced by an index, such as the Ibovespa, for example.
In the US, the main indexes are the S&P 500, Dow Jones, Nasdaq Composite and Nasdaq 100.
Conclusion
Now you know how much the increase in interest rates in the US affects Brazil and the reasons why this happens!
After all, higher US interest rates, which should contain inflation, increase interest in dollar investments.
This makes the dollar even more appreciated when compared to the real, which means that the Central Bank has to keep the Selic Rate (Brazil's basic interest rate) high for a longer period of time.
