Colombia Lowers Interest Rate to 12.75%

Colombia’s central bank, on January 31, decided to extend the interest rate reduction that had commenced in December. The majority vote among board members favored a 25-point decrease, bringing the rate down to 12.75% for the next two months. Notably, two members of the board had advocated for a more substantial 50-point reduction, but this proposal did not secure enough votes to pass.

Colombia has taken a significant step in its efforts to reduce interest rates. In the previous year, the country grappled with a high rate of 13.25%, which exerted immense pressure on the Colombian economy and impeded its growth due to the cost of credit

Inflation opens the door to further declines

In December, the country witnessed favorable inflationary data, marked by a significant decrease that lowered the Consumer Price Index to 9.28%. This positive development has influenced the central bank’s decision-making process. After months of debates involving the government, business leaders, and representatives from the economic sector in discussions with the Bank of the Republic, it appears that Colombia is heading towards a potential reduction in the cost of borrowing

“The decline in inflation was led by food and goods, which registered surprising downward trends,” said the central bank. Similarly, short- and medium-term inflation projections favor optimism. “The Bank’s monthly survey of analysts showed that in the median of the sample, their inflation expectations for one year fell from 5.7% to 5.2% and for two years from 3.8% to 3.6% between December and January,” said the issuing bank.

Experts point out that sharp declines are not to be expected in the coming months, but rather controlled decreases such as the one announced yesterday. Nevertheless, growth forecasts remain stagnant. In the absence of the official announcement, GDP growth in 2023 is expected to be 1% and an even lower growth of 0.8% is being calculated for 2024.

Between celebration and caution

Colombia’s president, Gustavo Petro, has welcomed the move, thanking the monetary authorities for their decision. “The employment data show it is time to lower the interest rate and allow economic growth. I thank the Bank of the Republic for deciding to lower the interest rate,” the president wrote on his social networks.

Fenalco, the association representing Colombia’s traders, had initially anticipated a 50 basis point reduction in interest rates by the Bank of the Republic. However, they have welcomed the central bank’s decision to lower the rate by 25 points. This positive reception comes in the context of ongoing efforts to combat inflation, which, despite improving to 9.28% by the end of last year, still remains distant from the targeted maximum of 4%.

Jaime Alberto Cabal, president of the association, pointed out that we cannot lower our guard in the battle against inflation at a time when the El Niño phenomenon may have a negative impact on the price of food and electricity rates.