Market news | 25 May, 2018

The importance of US interest rates

Alberto Villasán Investment and Markets Director

Continued increases in official rates (or interest rates) in the United States…

 

Over the last two years, we have witnessed interest rate increases by the US Central Bank (Fed), from the levels of 0% a few years ago, to the current 1.75%. This rise of 1.75% has occurred at a lower rate than in previous periods, which may have caused us to be unaware of its importance and its influence on the global economy.

 

…which significantly affects the economies in the rest of the countries…

 

The fact that many world economies have part of their debt and economic interests referenced to the USD means the level of US interest rates has a huge influence on global economic activity. Another important factor is that most raw materials are denominated in USD, which means that their price in other currencies depends on the value of the USD at all times.

 

These two factors could be responsible for the movements we have been seeing recently in the currency markets and in some emerging economies, as well as affecting other sectors such as banking or raw material prices.

 

…and negatively impacts both the weaker economies and their currencies…

 

The fact that there are high benchmark rates could be negative for the weaker economies, since many global investors consider investing directly in US bonds and Treasury bills, abandoning investments in less interesting countries. Argentina, for example, has had to pay more than 40% annually for its debt in pesos to be able to stop the downward spiral of its exchange rate and attract foreign capital, which has not happened since 2008.

 

In other geographies, such as the Eurozone, there is no question of raising interest rates, since this would have an extremely negative effect on the economy as a result of its high indebtedness and low endemic growth rates.

 

…this could continue as we see new rate hikes.

 

It seems that the pace of rate hikes and their levels by the Fed could continue to mark how economies develop and how certain risk assets perform over the coming months.