(Bloomberg) — Colombia’s central bank will likely cut its interest rate by a half-point, doubling the pace of monetary easing as inflation slows further and the economy struggles with lackluster growth.
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The bank’s seven-member board will lower rates to 12.25% on Friday, according to 25 of 28 economists surveyed by Bloomberg. One forecasts a third straight reduction of a quarter-point, while two expect a larger cut of 75 basis points.
Colombia has the highest borrowing costs among Latin America’s main inflation-targeting countries, and it also started to unwind monetary policy after most peers. The central bank is easing after the economy expanded just 0.6% in 2023, marking the weakest growth since 1999, excluding the pandemic. Price rises have waned to 7.74%, though they’re more than twice the 3% target.
What Bloomberg Economics Says
“Since the January meeting, data show slower inflation in line with central bank forecasts, and growth below potential and policymakers’ projections. This supports cutting rates, as do tight monetary conditions. Inflation and inflation expectations remain above target. Risks to the outlook are still biased to the upside.”
— Felipe Hernandez, Latin America economist
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Central bank Governor Leonardo Villar will announce the decision after 2 pm ET. Here’s what to watch out for:
Split Decision
Board members were unable to reach consensus in the past two meetings, and today’s gathering will not be any different. Finance Minister Ricardo Bonilla, who is a voting member of the monetary policy committee, has said he backs a full percentage point drop, arguing that high real rates are strangling demand.
On the other hand, Villar has called for prudence, saying there are still inflation risks and warning that unexpectedly large cuts could trigger capital outflows. Those remarks were echoed by bank co-director Bibiana Taboada, who said in an interview this month the institution should not surprise markets.
While Taboada acknowledged recent data paves the way for an acceleration in easing, she said Colombia should learn from Chile, where aggressive reductions sparked a currency rout that fueled new inflationary pressures.
Inflation
Regarding inflation, Taboada said factors including severe weather from El Nino and a recent minimum wage hike haven’t had a significant impact on prices.
Indeed, the convergence of inflation to target, which will likely happen by the middle of next year, and a weak economy back a half-point cut, according to Munir Jalil, the Andean chief economist at BTG Pactual.
“The central bank’s DNA is more of a progressive nature regarding the pace of rate cuts,” he said.
Key sectors including construction, manufacturing and oil and mining all contracted last year. Policymakers have also expressed their concerns about the drop in private investment.
Economists surveyed by the central bank this month expect the monetary authority to lower borrowing costs to 8.25% by year’s end.
–With assistance from Rafael Gayol and Giovanna Serafim.
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