On July 27th, the Fed‘s Monetary Policy Committee unanimously decided to increase the basic interest rate in the United States by 0.75 percentage points, to the range 2.25%-2, 5% a year, in an attempt to hold back inflation.
The bank will not consider stopping raising the basic interest rate in the United States until inflation has a firm drop, according to the minutes of the last meeting of the monetary authority, released this Wednesday afternoon.
How do increases in the US affect the Brazilian economy?
With the rise in interest rates in the US, the effects are already being felt on the São Paulo Stock Exchange, the B3. For analysts, it will be difficult to avoid the loss of capital to the US.
In April, for the first time in the year, the flow of foreign investments to the Brazilian Stock Exchange was negative, indicating the flight of capital from the country to the USA, where American public securities (called Treasuries), considered the safest in the world, are yielding more with the rise in interest rates.
For analysts, the intensity of monetary tightening in the US should be the deciding factor on the direction and intensity of foreign investment in Brazil, a developing economy.
Why does capital flow to the US?
Generally, high interest rates in the US drain capital from developing countries, such as Brazil. Risk appetite drops on higher US earnings prospects. Added to this is the growing uncertainty in China, which is facing new outbreaks of Covid with an impact on economic activity.
With the increase in interest rates in the US, US Treasury bonds, the so-called Treasuries, begin to pay more to investors, and the tendency is for everyone to run there. And that takes money from emerging countries, Brazil included – where the investment risk is much higher.
The ten-year US bond yield, closely watched by market agents, reached close to the 3% per annum level, something that had not occurred since 2018.
Therefore, in order to attract funds from abroad, the central banks of emerging countries have to offer ever higher interest rates, which ends up depressing the economy.
The money coming from abroad also has the effect of valuing the dollar against the real. And this can raise inflation as imported products become more expensive.
Who can benefit from this high interest rate in the US?
There is a group of investors who benefit from rising interest rates: those who bet on a fixed income. The decision announced by the Fed may even influence interest rates here in Brazil.