In seven months, the interest rate of the Banco de la República jumped from 1.75% to 5.0%, which shows an increase of more than three times (3.25 percentage points).
That is the rate that serves as a reference for commercial banks to approve credits to Colombians and companies for their financing plans. In other words, it means that the loans will be more expensive.
The decision of the Banco de la República aims to reduce the circulation of money and reduce pressure on inflation levels so that the prices of goods and services decrease, analysts say.
Total inflation continued its upward trend and registered an annual variation of 8.01% in February, within which the food category stands out, with an annual increase of 23.3%.
Russia’s invasion of Ukraine could intensify upward pressure on international prices for some agricultural goods and inputs, energy and oil. In this context, the different measures of inflation expectations have continued to rise. In the case of economic analysts, the monthly survey by Banco de la República showed that they expect a total inflation of 6.4% for 2022 and 3.8% for 2023.
Read here: Banco de la República raised its interest rates to 5%
5.0 percent is the reference interest rate of the Banco de la República approved by the Board.
But what are the consequences of the increase in the interest rate?
The credit will be more expensive, so it is feasible, analysts say, that users do not want to buy and possibly reduce the request for loan resources to acquire, for example, a home and a vehicle, among other products.
According to Asobancaria, through its portal ‘Know more, be more’, it will also be more expensive for companies to finance themselves, which can translate into lower profitability.
It should be noted that changes in the level of the intervention interest rate are intended to influence short-term growth and the variation in consumer prices.
This happens through different transmission channels, which can be defined in a simple way as the chain of events that begin with a change in the Issuer’s interest rate and, with a certain delay, affect the market interest rates at different terms, the exchange rate and inflation expectations, variables that in turn end up influencing prices.
The Banco de la República reported that the increase in the intervention interest rate also translates into an increase in the interest rates at which financial entities remunerate users’ deposits.
8.01 percent was the annualized inflation in the country with a cut in the month of February of this year.
“If the level of demand is consistent with the country’s production capacity, it is possible to control the pressures that exist on inflation,” added the Issuer.
Regarding the time it may take for the transmission of the Banco de la República rate, the financial institutions have an immediate effect on interbank operations, but not so for the loans that they will approve to clients.
“In general, monetary policy and its impact on credits have a lag, which can be delayed up to six months. In credit cards, it is not very noticeable because they are usually related to the usury rate,” said José Luis Hernández, an analyst at the Corficolombiana firm.
For Jaime Alberto Cabal, president of the National Federation of Merchants, Fenalco, the decision to continue increasing the Issuer’s reference rate goes in the right direction to counteract the increase in inflation.
However, the measure will affect some sectors in their recovery process, especially commerce, since thousands of users take credits to pay for the products they purchase.