BCR raises base interest rate again to 7.5%

The Central Reserve Bank (BCR) raised its benchmark interest rate again from 7% to 7.50% amid high inflation.

With this 0.25% increase, a new all-time high is reached by increasing base rate for 16 consecutive months.

This rate is used as a mechanism to control high inflation, which rose from 8.28% in October to 8.45% in November and is expected to return to the central bank’s target in the second half of 2023.

“A significant increase international prices energy and food since the second half of last year, 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 central bank inflation targets, as in advanced economies , and in the region,” BCR said in a statement.

For now, twelve-month inflation expectations have been cut from 4.78% to 4.68% in the October-November period, but they are still above the BCR target range of 1% to 3%.

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.

Last month, 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.