economy and politics

This is how the rise in rates of the Banco de la República affects your pocket

This is how the rise in rates of the Banco de la República affects your pocket

At the monetary policy meeting in July 2022, the Board of Directors of Banco de la República raised the interest rate to 9%, after applying an increase of 150 basis points.

(What monetary policy will the Banco de la República follow?).

This determination is part of a new normalization cycle that began in October 2021 and in which an upward trend in rates is observed.

Unquestionably, this rate hike has several direct and indirect effects among ordinary people, since this measure seeks to curb prices in the economy that have increased due to inflationary pressures and the global crisis, among other aspects.

(After five years, the Issuer raised interest rates again).

It should be noted that the intervention interest rate it is the main tool available to the monetary authorities of each country to control the price level.

The increase in this rate leads to a decrease in the rate of consumption and investment and reduces inflationary pressures via demand.

Therefore, and in order to control high inflation and maintain the purchasing power of the currency, the first effect that the rate hike will have will be an increase in commercial interest rates on new credits that consumers take from banking entities. .

With this, the Issuer seeks that people and companies take on less debt to consume and invest, since it is necessary to reduce the excess of spending over national income, that is, the current account deficit.

These effects will be progressive and will depend on the pace set by Banco de la República in its future decisions. However, the transfer of the rise will not be immediate, as it will take a few months to be felt.

Basically, the initial transmission mechanism of the readjustment of the intervention rate to the rest of the economy occurs through the financial system, since in addition to the increase in rates on credits, the increase can be transferred to a greater or lesser extent to the DTF, reference rate at which resources are raised in the financial system, depending on the liquidity of the market.

NOT ALL CREDITS GO UP

Although the interest on commercial credits does rise with this decision, it does not happen in all cases.

According to Francisco Azuero, associate professor at the Faculty of Administration of the Universidad de los Andes, there are credits that are at a fixed rate that cannot be changed because “constitute contracts that are in execution”.

(Rise in interest rates would be felt after more than a year).

He explains that the increase will be seen in credits that are currently with variable rates and in new credits. However, this transfer is gradual and proportional, which means that it will not have significant increases.

In addition, he clarifies, it is a temporary short-term measure, which seeks to control or try to curb inflationary expectations that may rise.

“This decision is very positive for the country, as it sends a reassuring message to the market and to ordinary people that we have a monetary authority that is constantly monitoring all variables and ready to react to possible inflationary outbreaks. The worst thing that could happen to the country is that inflation overflows right now.” Professor Azuero concluded.

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