The decision of the Federal Reserve to raise its interest rates to control the incessant inflation in the United States has caused dozens of central banks around the world to follow the same line, which has caused the Fed’s decision to end up exporting the price rise around the world
The almost unshakable position of the Federal Reserve to control inflation through the increase in its base interest rates has caused a phenomenon whereby these price increases have been exported to other countries.
Thousands of miles away and with budgets that are not based on dollars, millions of people are experiencing price increases that, in some way, are related to the battle that the Fed is waging in the United States to control domestic inflation.
The actions of the Fed with each decision to raise interest rates, the most recent in mid-September with a rise of 0.75%, forces the central banks of other countries to line up and raise their rates.
In these increases in national rates, it should be considered that the political actions taken in the United States have strengthened the dollar internationally, which causes the economies of other countries to suffer, since their currencies depreciate.
But why should countries be forced to raise their interest rates if the Fed does too? The problem is that if other countries’ central banks fall too far behind the Fed, investors could withdraw money from their financial markets, causing an even bigger economic problem.
For now, central banks in the UK, Switzerland, Norway, Indonesia, South Africa, Taiwan, Nigeria, the Philippines and Mexico have all announced interest rate hikes in recent days, after the Fed made it clear it is determined to squash inflation no matter what.
“We are seeing the Fed as aggressive as it has been since the early 1980s. They are willing to tolerate higher unemployment and a recession,” Chris Turner, global head of markets at ING, warned in a report for CNN.
“That is not good for international growth”, he added in relation to the outlook that is forecast for the months to come.
A stronger dollar leaves currencies lagging
The Fed’s decisions are also reflected in the international market, with movements in the value of currencies that complicate the monetary policies of other countries.
The strength of the dollar has been in the international headlines for several weeks now, and while that may encourage Americans to travel to spend abroad, for the economies of other countries it is bad news, even for those considered developed.
Against the dollar, currencies such as the yuan, the rupee, the yen, the euro and more recently the pound sterling have seen their value plummet against the greenback. This has the consequence that imports of basic products such as food become more expensive, with an almost inevitable price transfer for consumers.
This is basically what is seen as the Fed’s export of inflation, which adds pressure to the central banks of other countries.
In Japan, the central bank intervened for the first time in 24 years to strengthen the yen against the dollar, which until last week had lost 26% of its value against this currency.
The International Monetary Fund has put a personal mark on the strengthening of the dollar that threatens the eurozone, because according to its president, Christine Lagarde, the depreciation of the euro has begun to “add inflationary pressures.”
The most recent case was the collapse of the pound sterling against the dollar, which reached its lowest historical level against its US counterpart, after the new government announced its new economic model.
But they are not the only economies that suffer, one of the most important risks of exporting inflation and the strengthening of the dollar is for the so-called emerging countries.
The World Bank recently warned of lasting impacts of a recession in 2023 for developing economies that are barely recovering from the shocks of the pandemic.
The risk is more real for emerging economies that have debt based on dollars, since the payment of their obligations may be more difficult to consolidate, at the same time that their currencies depreciate.