The new and extreme rise arranged by the Central Bank for the reference interest rate, which jumped from 60% to 69.5%, will have direct effects on consumption and on the most common form of financing: the credit card. The BCRA also ordered an increase of the same magnitude in rates to finance plastic money. Those who cancel the minimum payment, or a payment less than the total of the summary, must finance the balance by paying an interest of 71.5% and not 62% as before. Once taxes and other expenses are added, this rate will increase until it reaches 125% of the Total Financial Cost (CFT).
Since August 1, the rate had already risen from 57% to 62%. In this way, this second rise in a few days will make financing with credit cards more expensive. The use of cards grows clearly below inflation. In July, “credit card operations recorded a balance of $1,650,615 million, which means an increase of 2.5% compared to the end of last month, some $40,108 million above June. Year-on-year growth reached 66.8%”, according to a report by First Capital. In the same period, as reported by Indec on Thursday, inflation reached 7.4% in the month and 71% in the year-on-year measurement.
“After the period of promotions carried out by electronic commerce and before the rise in rates, there is a drop in sales offers in interest-free installments, for this reason we see a fall in real terms of the accumulated balances of this item”the analyst explained William Barber.
“Although Argentine households and companies are highly deleveraged, the rise in rates has effects on the payment chain and on consumer financing” (Econviews)
This obstacle to consumption is one of the signs of the coming scenario: a brake on economic activity, which only has a positive carryover from the strong growth of 2021. A consultant’s report Econviews He explains that the rise in rates was inevitable, since with rates so far from inflation it is not possible to try to stabilize the economy as the new economic team headed by Sergio Massa intends. But he also explains that raising rates is not free.
“The level of activity will also suffer the impact. Although Argentine households and companies are highly deleveraged, the rise in rates has effects on the payment chain and on consumer financing. Card financing for small amounts now has a nominal rate of 71.5%, which, once taxes are added, leaves a total financial cost of around 125%.. It is likely that many households choose to pay off debt before consuming, or perhaps some may sell dollars to pay off debt, helping the goal of the gap,” the report states.
The rise in rates also has consequences for companies. “At a corporate level, the payment chain is the main problem”, Econviews noted. Is that the rise also covers the line of productive financing for SMEs. That line arises from a Central Bank rule by which banks must lend a part of their fixed terms from the private sector to small companies with a subsidized rate. That cheap credit, they explain in the banks, is the only one that today has genuine demand from the SME sector.
Personal loans, another indicator of financing for consumption, left a meager growth in July, of only 3.8% in the month and 64.2% in the last year, in both cases without being able to beat inflation
Until last month, the Productive Financing line had a rate of 42.5% to finance investment projects and 50% to obtain working capital. those rates were increased on August 1 to 50% and 58%, respectively. From now on, the Central Bank raised them to 59% and 69%.
Deliberate or not, making loans to companies more expensive has another benefit for the entity he presides over Miguel Pescewith an eye on exporters: discourages taking loans in cheap pesos to be financed while the liquidation of foreign currency is delayed.
With the strong increase defined, “the BCRA rates are practically in line with the expected inflation in August (around 6%) and above the crawling peg of the official exchange rate (5.6%), discouraging the taking of credits in order to postpone the liquidation of foreign currency in the Single Free Exchange Market”, explains a report from balances.
Beyond that indirect benefit, the rise in rates will imply a blow to consumption, which the Government has always put at the center to sustain economic activity. And to spin that wheel, credit helps less and less. Although historically Argentina is one of the countries with the least amount of credit in relation to GDP, the rise in rates will begin to further erode the chances of financing.
According to data from First Capital, total credit in pesos to the private sector during July rose by 79.8% year-on-year, just above 71% inflation. In the month, growth reached 5.6%, well below the 7.4% of the CPI. Personal loans, another indicator of consumer finance, they also left a meager growth, of only 3.8% in the month and 64.2% in the last yearin both cases without being able to beat inflation.
The Index of Financial Conditions (ICF) prepared by the Argentine Institute of Finance Executives (IAEF) also reported the critical moment for financing, to which is now added a rate hike. The Index “sunk more than 50 points in July, going from -109.2 to -160.1, the worst record since April 2020, even worse than May 2020, with the whole world in lockdown”.
“There was a deterioration in international conditions, but above all a great debacle in the local financial conditions that touched their historical minimum since 2005even below the pandemic or after the surprise result of the 2019 primary elections, ”said the IAEF.
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