Banco de la República raised the interest rate by 50 points, find out how this affects the country’s economy!

the Board of Directors of Banco de la República carried out the monetary normalization process and reached the decision to raise the interest rate by 50 basis points, up to 3%. This decision was made by a majority vote of the board.

The decision was made taking into account that inflation surprised on the upside in November, when it closed at 5.26%. The Bank’s general manager, Leonardo Villar, assures that “annual inflation also showed an upward trend at 2.54%, 52 b.p. above October’s level. These results led to a revision of the inflation forecast to 5.3% for 2021 and 3.7% for 2022”.

Regarding inflationary pressure due to the 10.07% increase in the minimum wage, the manager assured that “the increase in the minimum wage, slightly more than seven percentage points above the inflation target, generates a particularly strong challenge for the Banco de la República and for the fulfillment of its constitutional mandate”.

It should also be added that, if a low and stable inflation is maintained, the increase in nominal wages will not be diluted by an increase in prices and therefore that it becomes a real increase for workers’ wages It was highlighted, that indicators show that the GDP continues with an important dynamic in the fourth quarter, reaching levels higher than those evidenced in the pre-pandemic.
We cannot overlook the effects of the increase in the interest rate. When the interest rate rises, among many other effects, the most important and of greatest impact for the business sector and for the economy, is the increase in credit, so that companies will see an increase in the cost of their financing and their costs in general, resulting in lower profitability and even in a loss of market share for some of them.

As the cost of credit increases, consumers will reduce their consumption, they will no longer use their credit cards or apply for credit for housing, vehicles, etc., a situation that leads to a decrease in demand, which has a direct and negative impact on the business sector.

Source: La República, Gerencie

https://www.larepublica.co/economia/banco-de-la-republica-subio-la-tasa-de-interes-en-50-puntos-basicos-ubicandola-en-3-3278775 https://www.gerencie.com/que-pasa-si-el-banco-de-la-republica-sube-o-baja-la-tasa-de-interes.html