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Colombia Delivers First Rate Cut, Cautious About Next Moves
(Bloomberg) -- Colombia delivered its first interest rate cut in three years, lowering borrowing costs by 25 basis points as signs of a faltering economy overtake inflation concerns.
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The central bank reduced its benchmark rate to 13%, Governor Leonardo Villar told reporters in Bogota after Tuesday’s policy meeting. The decision was backed by five of the bank’s seven board members, with two voting to keep the rate at 13.25%. Twelve of 22 economists surveyed by Bloomberg correctly forecast the move, while the rest expected interest rates to remain unchanged.
Villar said policymakers are cautious about next moves, paying a lot of attention to the behavior of consumer prices and inflation expectations. “We need to watch what’s happening to the sources of this inflation to see if it’s possible to keep cutting interest rates,” he added.
Colombia now joins Brazil, Chile, Peru, and other smaller Latin American economies that have started easing monetary policy as inflation slows toward target and economic activity cools.
Colombia’s annual inflation eased to 10.15% in November, the eighth consecutive month of declines. It is still faster than in most Latin American countries, and well above the 3% target, which includes a tolerance range of plus or minus 1 percentage point.
Slowing growth, however, is now a chief concern. The economy unexpectedly contracted by 0.3% in the third quarter from a year earlier, while preliminary data show it has continued to struggle since then.
What Bloomberg Economics Says
“The small move, split vote and cautious guidance suggest they’re still concerned about upside risks and prefer to wait for more data before considering bigger cuts. We expect the central bank to slowly cut rates next year as inflation and inflation expectations continue decelerating and growth remains below potential.”
— Felipe Hernandez, Latin America economist
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The central bank’s decision follows pressure from President Gustavo Petro, who has called on policymakers to provide a boost to the ailing economy. Finance Minister Ricardo Bonilla, who has voted for rate cuts in the past three policy meetings, has argued since September that interest rates should be lower to promote economic growth.
“The statement is cautious, as the bank remains data dependent and makes a call that the minimum wage adjustment shouldn’t be significantly above the annual inflation rate,” said Erick Martinez Magana, a strategist at Barclays in New York. “We see limited implications for the peso, as the currency has enough carry to withstand initial cuts, and the global backdrop is constructive.”
Growth Deterioration
Manufacturing production and retail sales fell 5.9% and 11% annually in October, respectively. The ISE economic index, a proxy for gross domestic product, also contracted, indicating that the economy’s deterioration has carried over into the fourth quarter.
Colombia’s current account deficit narrowed to 1.7% of GDP in the third quarter, the lowest since 2009. Weakening internal demand, a fall in imports, and the biggest emerging market currency rally this year were among factors encouraging policymakers to ease monetary policy.
Central bank board members are keeping a close eye on the effects of the El Nino weather phenomenon on food and energy prices and the possible impacts of next year’s minimum wage increase, which is currently being debated by business leaders and unions.
“The board of directors urges caution during the adjustment of the minimum wage so that it does not significantly surpass the increase of consumer prices in 2023,” they wrote in the statement.
--With assistance from Maria Elena Vizcaino.
(Updates with comment from central bank governor, statement, starting in second paragraph.)
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