The US Federal Reserve (Fed) raised interest rates by a quarter of a point on Wednesday and the central banks of the UK, Norway and Switzerland followed suit on Thursday.

The logic behind the move is that if the cost of money is increased, consumption is discouraged and a brake is applied to the inflation that is experienced in the US economy.

In Panama there is no central bank that prints money, so the Fed's policy has a significant impact on the cost of funds for local banks.

"This is a sign that money in the world is going to become more expensive and will continue to become more expensive until inflation turns the corner," said Carlos Berguido, executive president of the Panama Banking Association (ABP).

The economist Carlos Araúz recalled that the events of recent weeks in the banking sphere, with the fall of Silicon Valley Bank, had a significant effect on the Fed's position since the unemployment and inflation data pointed to a rise higher than the announced 0.25 points.

The rate hike means the cost of borrowing increases. It becomes more expensive to take out a mortgage or a loan to purchase a vehicle. And the same thing happens with the public debt that the country acquires.

Araúz says that in Panama there are many immediate and medium-term effects.

“Everyone with a mortgage in the non-prime sector or in the commercial sector will receive one or two or more rate hike letters this year, affecting local purchasing power and thus affecting aggregate demand.”

With greater interest at the commercial level, everyone's life becomes more expensive, because companies transfer this adjustment to the consumer, practically as if it were a tax, said the economist.

So, "the rise in interest affects us all, without exception, directly or indirectly."

In terms of public finances, the effect on sovereign debt interest rates has already been seen.

The $1.8 billion, bond issue when the interest rate a little over a year ago was around 4.64%, said Araúz translates into almost $39 million more that will be used to pay interest instead of building roads or removing ranch schools,” Araúz said.

Credit caution
"Rises in rates have created unrealized losses in banks' treasury positions and therefore caution with credit will reign for the remainder of the year," Araúz explained.

Since mid-January, the clients of several banks have received the announcement in their emails that the entities will raise the interest rates of their mortgages, credit cards, and personal loans.

One point that banks see as positive for Panama is the competitiveness of the market, with more than 42 banks participating in a country of 4 million people.