Colombia’s central bank kept borrowing costs unchanged Friday, likely ending its most aggressive monetary tightening cycle ever as inflation slows and the economy loses momentum.
The seven-member board voted to maintain the benchmark interest rate steady at 13.25% for the first time in almost two years, Governor Leonardo Villar told reporters in Bogota. The move was forecast by all 26 analysts surveyed by Bloomberg.
The decision snaps a series of 14 straight hikes that boosted the key rate 11.5 percentage points since September 2021. Colombia’s central bank is the latest among Latin America’s five major monetary authorities to stop raising rates. Policymakers in Peru, Chile, Brazil and Mexico all held borrowing costs unchanged earlier this month, and some of them are already signaling imminent rate cuts.
In Colombia, a two-year surge in consumer prices peaked in March at a 24-year high of 13.34%, followed by two months of deceleration that brought the rate to 12.36% in May. Economists surveyed by the central bank see inflation slowing to 9.02% by the end of 2023 and 5% in 2024. The central bank targets an annual rate of 3% plus or minus 1 percentage point.
The disinflation process has been led by food prices and bolstered by the 16% appreciation of the peso against the dollar this year — the best performance among 31 major currencies tracked by Bloomberg. That strength has helped to keep a lid on the cost of imports, dampening one source of inflationary pressure.
Finance Minister Ricardo Bonilla said earlier in June that policymakers could start to ease monetary policy within three months as inflation cools and the peso stabilizes around its current level, potentially lowering the benchmark rate by 2 percentage points by year-end.
Read More: Finance Chief Says Colombia Could Cut Key Rate by September
Still, potential headwinds remain. Some economists see risks of sustained inflation pressures from the government’s decision to lift gasoline prices along with the additional threat of higher food and energy costs stemming from the onset of the El Niño weather phenomenon. Elevated and still rising core inflation readings also are a source of concern.
Weaker Economy
Economic activity contracted by 0.8% in April from the previous year and has declined in two of the past three months, underscoring the drag from double-digit interest rates and inflation.
“Tight monetary conditions and the necessary adjustment to return activity to sustainable levels after rising above potential are taking hold,” Bloomberg Economics analyst Felipe Hernandez said before the meeting.
Economists surveyed by Bloomberg forecast gross domestic product to rise 1.5% this year after a 7.3% expansion in 2022, less than expected in Brazil, Mexico, and Peru but higher than in Chile.
--With assistance from Rafael Gayol.