The Central Bank (BCU) sees the effect of the slightly contractionary monetary policy (after successive increases in the reference interest rate to 10.25%) in terms of making credit more expensive and slowing its growth.
That would help limit upward pressure on prices on the demand side. However, the Central hopes that the inflation fundamentals (including those products and services with greater volatility such as fruit and vegetables and tariffs), remain high.
This analysis i Minutes of the Monetary Policy Committee meeting (Copom) of the BCU, an area that integrates the technicians with the Main Board, last Monday.
Then, the BCU board decided by a majority to raise the reference interest rate from 9.75% to 10.5%. The president voted for Diego Labat (National Party) and Vice President Washington Ribeiro (National Party), while director Ignacio Berti (Frente Amplio) voted against it, as he has been doing since the rate began to rise in July 2021.
As has happened in recent months, the BCU did not disclose the proposal made by the technicians at Copom.
The BCU analyzed that the interest rate charged by the banks to companies for credit in the national currency continued to increase, standing at 12.2%.
He also considered that credit in the national currency slowed down “in real terms, after the significant increase in the last quarter of 2021” and noted that “this behavior was mainly seen in credit granted to companies and that lesser point in consumer credit”.
This is what the BCU decisions are looking for. The reference interest rate, which the BCU raised on Monday, is the “money price”: it indicates the cost of bank credit in pesos. In other words, it is what it “costs” your bank to get liquidity (pesos) for a term of one day (from other banks or from the Central Bank itself). In this way, it is transmitted to credit for companies and households in the national currency, making it more expensive.
The reference interest rate is transferred to the interest rates charged by banks and finance companies on loans. In theory, by making credit more expensive, saving becomes more attractive than consumption.
Regarding consumption, BCU’s analysis showed that “less dynamism is shown, in a less favorable international situation.”
After Monday’s decision, the BCU plans to “continue with similar increases in the next meetings” (that is, 50 basis points each time), which would leave the reference rate at 11.75% at the end of the year.
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