End of cheap money in Latin America: how does the rate hike impact consumers?

First modification: 07/08/2022 – 18:55

If a year ago an American paid an average of 2.9% annual interest for a 30-year home loan, today he would pay twice as much.

Mortgage interest rates in the world’s leading economy exceed 5%, a level not seen since the end of the 2008-2009 global recession, which precisely had its roots in this area.

But the mortgage sector, and the case of the United States, are not the only examples. The strategy of making access to credit more expensive has been replicated throughout the world in recent months, with very few exceptions.

The era of ‘cheap money’ has come to an end in Latin America

A central bank determines the minimum rate at which it lends to the different market agents, such as banks, which are then in charge of placing loans to the public with a spread that varies according to the modality, economic analyst Jorge Hernando explained to France 24 Garcia Castro.

In the worst moments of the Covid-19 crisis, most of the world’s central banks decided to reduce these types of intervention as much as possible to encourage consumption.

However, once the worst part of the pandemic was over, the mix of millions of citizens eager to consume and a global logistics crisis, added to a war in the making, caused an indiscriminate rise in prices that forced decision makers to monetary policy to overturn its strategy.

Higher loan rates are the new reality. And Latin America is a good example: in just one year, Peru went from having an intervention rate of 0.25% to 6% today; Colombia jumped from 1.75% to 7.5%. Chile, Brazil and Mexico also multiplied them by far.

“The high interest rates impact the pockets of consumers because the cost of the debt they acquire through the financial system through the different types of credit: mortgage, consumer and free investment, among others, becomes more expensive,” García added. Castro.

The increased cost of credit discourages buyers and helps to “cool down” the economy, although it also benefits those who invest their money in fixed-term deposits, such as CDTs.

If this were the economic thermometer, the region’s central banks could already feel well served because their most recent increases in interest rates have discouraged consumption and slowed down the economy.

However, the task of a central bank goes much further and now, to stubbornly high inflation, fears of recession are being added.

With AP, EFE and Reuters