Rising U.S. Interest Rates and Capital Flows Implications for Latin America  and the Caribbean”

The U.S. Federal Reserve’s recent cycle of interest rate hikes has had a ripple effect across global financial markets, redirecting capital flows toward U.S. assets and away from emerging economies. For Latin America and the Caribbean, this trend has translated into tighter liquidity, higher borrowing costs on dollar-denominated debt, and increased currency volatility. Caribbean nations, in particular, face mounting fiscal pressures given their reliance on external financing, while larger economies like Brazil and Mexico are navigating volatile capital inflows and outflows. These dynamics highlight the region’s exposure to U.S. monetary policy and underscore the need for stronger fiscal frameworks, deeper local capital markets, and diversified financing sources to mitigate vulnerability in a more uncertain global environment.

How Rising U.S. Interest Rates Reshape Capital Flows into Emerging Markets

As the U.S. Federal Reserve raises interest rates to combat inflation, global investors are increasingly drawn to U.S. bonds and equities, shifting capital away from emerging markets. This realignment has hit Latin America and the Caribbean particularly hard, with reduced portfolio inflows, higher sovereign bond yields, and mounting pressure on currencies like the peso and real. For governments, higher borrowing costs complicate fiscal planning, while businesses face tighter credit conditions. Yet the picture is not uniformly negative—countries with stronger fiscal frameworks and diversified economies, such as Chile and Peru, are better positioned to maintain investor confidence. The evolving financial landscape underscores the delicate balance emerging markets must strike between growth, stability, and external vulnerabilities.

U.S. rate hikes are redirecting global capital flows. Learn how Latin American and Caribbean economies are adapting to higher borrowing costs and volatility