Colombia Continues to Lower Interest Rates

Colombia continues to reduce interest rates. The country’s central bank, the Bank of the Republic, made a larger cut than in its previous two meetings. The new rate is now 12.25%, a drop of 50 basis points from the rate established in February.

After months of requests from the Colombian government and business leaders, the issuing body is now taking action. Colombia faced weak economic growth throughout 2023, with disappointing figures continuing into the first two months of this year. This situation has turned the spotlight on the central bank, leading to increased pressure on credit prices in Colombia.

Beginning of major cuts

With this decision, experts see an open door for even larger interest rate cuts in the future. At the meeting last Friday, March 22, five members voted for the finally approved decrease of 50 points, while another member supported a decrease of 75 points and yet another voted for a decrease of up to 100 points.

Thus, while maintaining the issuing bank’s traditional policy of prudence, which has kept a very high rate throughout 2023, the good performance of inflation in Colombia seems to open the possibility of an easing of the Colombian economy, thanks to this decrease.

Last Friday’s discussion took into account the falling trend of total inflation, which continued in February, standing at 7.7% annually, which represents a drop of 1.5 percentage points in the first two months of the year.

Good outlook for inflation

Inflation is the main reason for this new phase of interest rate cuts. Just as a rising Consumer Price Index (CPI) opened the door to a phase of higher rates since 2022, the significant declines in the CPI, especially since December, support the thesis of an immediate rate cut.

Similarly, the outlook for the remainder of the year for inflation has also improved. The technical team revised its inflation forecast for the end of 2024 from 5.9% to 5.4%. If this proves correct, the government’s ultimate target of placing annual CPI at 3% could be met by mid-2025.

In any case, Leonardo Villar, manager of Bank of the Republic, has reiterated his umpteenth message of caution. Villar affirms that the bank’s future decisions will depend on whether there is a consolidation of good inflation figures in the country.

Slight economic growth

The unfinished business of the country’s good economic data continues to be economic growth. Although the issuing entity has also revised upwards this value for 2024, from 0.8% to 1.1%, growth is still weak.

With the new measures and easier access to credit, growth is expected to consolidate, after a critical 2023 for several economic sectors. Construction, on which hundreds of thousands of jobs depend, was particularly hard hit.

The economy in general has experienced a very hard year and a half. Despite this situation, not all variables have been negative. In 2023, domestic demand contracted by 3.8%. This resulted in a significant adjustment of the current account deficit from 6.2% of GDP in 2022 to 2.7% in 2023, which helped reduce the country’s external vulnerability.