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Tuesday, January 31, 2023

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Central Bank raises interest rate to 5 percent

The Central Bank decided to increase its monetary policy interest rate by 50 basis points, going from 4.50% to 5.00% per year.

In this way, the rate of the permanent liquidity expansion facility (1-day Repos) increases from 5.00% to 5.50% per year and the interest-bearing deposit rate (Overnight) from 4.00% to 4.50% per year.

In a statement issued on January 31st, the monetary authorities indicated that this decision is based on an exhaustive evaluation of the behavior of the world economy, the greater persistence of inflationary pressures and the perspectives of international financial conditions.

The entity explained that price dynamics continue to be affected by external shocks that are more permanent than expected, associated with higher prices for oil and other important raw materials for local production, as well as the increase in the global cost of transporting containers and other disruptions in supply chains.

In particular, the monthly variation of the consumer price index (CPI) in December was 0.73%, while the year-on-year inflation at the end of 2021 was 8.50% and the year-on-year core inflation, which excludes the most volatile prices of the basket, reached 6.87% in December 2021, reflecting second-round effects on production associated with supply shocks.

“Going forward, the BCRD’s forecasting system indicates that, in an active monetary policy scenario, year-on-year inflation would converge to the target range of 4% ± 1% during the monetary policy horizon, slower than originally forecast”, per the Central Bank statement.

The financial institution stressed that this decision to increase the reference rate is part of the monetary policy normalization plan being implemented by the Central Bank with the purpose of moderating price shocks and contributing to the convergence of inflation to the target range, in a context of highly dynamic economic activity.

“In that sense, this increase of 50 basic points in the monetary policy rate, together with the increase of 150 basic points in the months of November and December, place the reference rate at 5.00% per year”, the statement specifies.

It refers that additionally, the BCRD has significantly reduced the excess liquidity of the financial system, especially through open market operations, to accelerate the monetary policy transmission mechanism, with the aim of mitigating additional inflationary pressures and preventing that an overheating of the economy is generated in the future that could cause an internal macroeconomic imbalance.


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