BCR raises base interest rate again, what does this mean?

The Central Reserve Bank (BCR) announced a new increase base interest ratewhich has been growing for the last 18 months.

Now BCR has raised the rate by 0.25 points, from 7.50% to 7.75%, a new all-time high, due to high inflation.

As you know, this rate is used as a mechanism for managing high inflationwhich reached its highest level in 26 years at the end of 2022 and stands at 8.46% according to BCR.

“The significant increase in global energy and food prices since the second half of 2021, exacerbated by international conflicts, has led to a sharp increase in global inflation on a scale not seen for many years, and to levels well above inflation. objectives of central banks in both advanced economies and the region,” BCR said in a statement.

Despite the sharp increase in speed Prices Last year, BCR predicted that we would see a further downward trend from March.

Similarly, inflation is expected to return to the target range of 1% to 3% in the fourth quarter of the year, i.e. between October and December 2023.

What does an interest rate hike mean?

Let’s remember that central bank defines a reference interest rate as one that is set for “the purpose of establishing a level of reference interest rate for interbank transactions that affects the transactions of financial institutions with the public.”

When the BCR reference rate rises, the interest rates applied by banks, savings banks, and finance companies on the loans they offer rise, making borrowing more expensive.

A few months ago, data from the Banking, Insurance and AFP (SBS) showed that interest rate credit cards topped 60% a year, while home loans rose to 9%, the highest level in six years.

But not only does this mean an increase in the cost of credit, a higher base interest rate also results in an increase in the yield offered by banks and other financial institutions to those who invest their money.