With a decrease of just 25 basis points (bp), in contrast to what the markets and analysts had estimated, which would be 50 bp, The Bank of the Republic closed 2024 leaving its intervention rate at 9.50%.
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Caution was once again the main motivation of the members of the board of the Colombian central bank, who saw in the international situation and the factors of internal uncertainty the elements to adopt that decision for which five members voted. One more voted to lower 50 bp and another for 75 bp.
The manager of the Bank of the Republic, Leonardo Villar, said that annual inflation in November was 5.2%, below the record of 5.4% in October. Inflation without food or regulated items remained around 5.4%, as a result of the persistence that service inflation continues to show.
He assured that by 2025 the technical team predicts that inflation will continue its convergence towards the goal, although more slowly than expected in the October report, due to upward pressures on the exchange rate and its transfer to prices. “The above reduces the room for maneuver to maintain the pace of interest rate cuts,” said.
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For the board, recent exchange pressures have been associated, among other reasons, with the tightening of external financial conditions, with increases in long-term interest rates in the United States, reductions in the expected pace of interest rate cuts in the Fed (central bank) and increases in the risk margins of emerging economies. Additionally, uncertainty about the situation of public finances in Colombia has generated volatility in the foreign exchange and public debt markets.
He recalled that GDP reached 2% growth in the third quarter thanks to the strengthening of domestic demand marked by the recovery of gross capital formation (20.3%). With this, the Colombian economy accumulates growth of 1.6% until September compared to the same period in 2023. For their part, labor market indicators have remained relatively stable with unemployment rates lower than their pre-pandemic levels.
For Villar, the approved interest rate reduction continues to support the recovery of economic growth and maintains the required prudence given the risks that remain regarding the behavior of inflation.
In what was his first board of directors at the Colombian central bank with the right to speak and vote, since he had already attended several in which no rate decision was made, the new Minister of Finance, Diego Guevara, said that this meeting materialized the controversies over the speed at which the rate should be lowered because “inflation has been lowered and there is room to lower the monetary policy rate further.”
Guevara emphasized that the macro indicators of GDP, unemployment and inflation are showing good figures, so “We will insist on a further reduction in the rate.”
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For his part, Villar warned that the decrease in the pace of lowering rates did not have any political motivation, nor did it have to do with the fact that at the beginning of 2025, President Gustavo Petro will replace two members of the board of directors, that could adopt a trend towards more accelerated decreases in the monetary policy interest rate.
And although he agreed that there is room to lower the interest rate further, concerns about risks in international and local conditions, debt risk margins and the depreciation of the peso against the dollar that go hand in hand with other currencies mean that prudence is what sets the pace of the rate’s decline.
‘Better not have to go up again’
He emphasized that the criterion that prevailed was that “There is continuity and sustainability in this policy and that a hasty policy does not lead to stopping or having to reverse the reduction of the rate as in other countries, including in the region such as Brazil.”
Shortly after the meeting of the Banco de la República ended and the reasons for the decision were announced, President Gustavo Petro expressed his discontent with the determination, attacking head-on the autonomy of the central bank.
The President expected a more aggressive cut to close the year and through the social network X said that the cut was insufficient and was due to political criteria.
“The reduction of 0.25 points in the interest rate by the Board of Directors of Banco de la República is a political decision. It seeks to prevent the economy from growing under a progressive government and sacrifices the National economy and the people of Colombia. However, next year I will insist that interest rates be reduced in the country.”Petro stated in his X account.
Guevara said that despite what many believe, the Government will comply with the fiscal rule in 2024 despite the challenges on the fiscal front. Villar marked what the rate decisions could be in 2025 as he considered that having upward pressure on the dollar forces a more restrictive policy. “It is not common to go from lowering the interest rate by 25 to lowering 75 bp,” he warned.
It must be remembered that for Portafolio, the board of directors of Banco de la República was the economic personality of the year in Colombia. This medium highlighted the effective work of the Board of Directors in stabilizing inflation. As the year went by and inflation eased, the central bank’s board of directors moved its intervention rate downward, through adjustments in which caution prevailed.
Holman Rodriguez
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