BCRP reduced its interest rate: what does it mean and how does it affect your pocket?

The Board of Directors of the Central Reserve Bank of Peru, headed by Julio Velarde, has decided to limit the interest rate to 5.75%. This change has left thousands of Peruvians wondering exactly what it means and how they can make the best of it. Given this, the economist, PUCP Finance Director and former Minister of Economy and Finance, Alonso Segura, tells us the following:

“This is the monetary policy interest rate that the BCR uses to influence how much it costs banks to lend money to each other on short terms.”That is, the Central Reserve Bank of Peru (BCR) uses a tool called the monetary policy interest rate to control the amount of money circulating in the economy. By adjusting the monetary policy interest rate, the BCR can influence the cost of credit for banks.

For his part, the Director of the School of Economics of the Santo Toribio de Mogrovejo Catholic University (USAT), Renzo Vidal, tells us the following: “The reference interest rate is only a reference, and when the Central Bank modifies it, whether to 6%, 7% or 5%, the banks take it as a basis to adjust their own interest rates.”

In this way, the establishment of the rate is an indicator for banking entities. This will tell them whether they should raise or lower their interest, as well as the amount of loans and their requirements. Besides, Renzo Vidal adds:“The objective of the Central Bank in reducing the reference interest rate is to establish a level that encourages economic activity in the market. After having managed to control inflation, because the main objective of a central bank is to control inflation and ensure that it does not shoot.”

BCRP interest rate: what will be its effects?

As previously mentioned, the increase or decrease in the BCRP interest rate is a reference for banks. The result of this has more direct consequences for some than for others. In the case of banking entities, this helps them better set their own interest rate; However, there is a doubt as to how what was established by The Central Reserve Bank of Peru will affect citizens.

“In a more general sense, the BCRP reference rate influences the cost of credit in the economy, especially for short-term loans. In this way, when it falls, it lowers the cost of credit for everyone, stimulating the economy. When it goes up, it makes it more expensive.”said the economist Alonso Segura.

For his part, economist Renzo Vidal points out that a decrease in the interest rate encourages consumption, explaining it through the following case: If you visualize people from the middle class, which is the largest number of people in an economy, you will see that many of them have at least one card. However, consuming means passing the card. However, if my payment in the end is more than having consumed cash, people reduce that consumption a little with credit and consume more cash. But what does that mean? That by consuming more cash you will save less. So, it is also incentivizing savings in some way or another. Obviously, by not generating debt, you start saving a little more.

In this example, The economist points out that by reducing the interest rate, banks will reduce their consumption charges. Therefore, Since there is a lower charge per credit, users are incentivized to consume more and, at the same time, they avoid using cash, which also generates savings.

Bank loans in the face of the new interest rate: how will it affect the population at risk of extreme poverty, according to the INEI?

The new INEI reportabout the increase in extreme poverty and the possibility that another 31.4% of the Peruvian population is at risk of falling into itraises questions about people’s credit prospects, especially now that the BCRP has set its interest rate. In this context, the economist Alonso Segura comments: “Prices go up, which leads to an increase in interest rates.”

Finally, he pointed out in more depth the risk it would entail and people’s ability to pay: “It is determined, to a large extent, by the payment capacity of potential debtors, and this depends on their income and job opportunities. As poverty and vulnerability increase, these indicators deteriorate and, with it, interest rates rise for these people. However, access to credit is also reduced. It is more difficult for them to qualify, unfortunately.”