Colombia Announces Interest Rate Cuts to Boost Economy

Colombia has announced larger interest rate cuts. Despite reiterating the message of caution, the manager of the Colombian central bank, Leonardo Villar, has accepted that with the inflationary data for February, the conditions are in place for the bank to decide on larger decreases in an interest rate that continues to put pressure on the country’s economic activity.

February marked an inflation of 7.74%, confirming a clear downward trend, after two difficult years in which the expensive price of credit was the main tool to fight inflationary escalation. Although inflation began to fall at the end of 2023, interest rates have so far declined little, by 25 points at each review. Since February, the rate has stood at 12.75%.

Villar’s announcement opens up the possibility of a further decrease at the next review by the issuing bank. At last, the demands of the government and economic agents, who have been asking the Bank of the Republic (Banco de la Republica) for months for a more courageous policy to lower rates and favor economic activity, are being met.

Reviving the economy

In a meeting with representatives of the legislative branch, Leonardo Villar accepted for the first time the possibility of rates continuing to drop. “We see that inflation is moving in the direction of meeting the target,” assured the manager of the issuing bank in an intervention in the Fourth Commission of the House of Representatives, in which he reaffirmed the bank’s commitment to reach a rate of 3% by mid-2025.

With this initiative, Colombia expects economic recovery to be a fact, after a very negative year, since economic growth in 2023 was a meager 0.6%. All analysts agree that one of the hardest factors to explain this low growth would be the high price of credit in Colombia, which hampers many entrepreneurs and consumers in general.

Although the manager of the banking institution repeated the message of “prudence”, his intervention was important because it marked a path that, until now, he had never dared to pronounce publicly. “We must continue to be very cautious while recognising that ‘continuing to be very cautious’ does not mean that the reductions must always be 25 basis points,” Villar told the political representatives.

New chapter in the Colombian economy

The possibility of a more accelerated interest rate cut by the Bank of the Republic opens a new chapter in Colombia’s economic agenda. Leonardo Villar’s statements reflect not only an intention to adapt to changing market conditions but also a commitment to long-term stability and economic growth.

In the meantime, businessmen and consumers see a glimmer of hope after two difficult years in the face of a negative outlook that actually began in March 2020. The effects of the Covid-19 pandemic, and the consequent confinement, paralyzed the world economy and had a very significant impact on Colombia.

With a significant currency devaluation and a dollar of around 4,000 pesos, the beginning of the war in Ukraine, in February 2022, started a global inflationary escalation that left the Colombian annual CPI at 13.3% in March last year.

Today, the outlook is less bleak, as the current CPI of 7.74%, together with forecasts of continued declines throughout the year, make it probable that the government’s target of around 5% inflation by the end of 2024 will be met.