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Colombia Seen Holding Rates on Slow Disinflation: Decision Guide

Colombia will likely hold its interest rate steady for the fourth straight meeting on Tuesday, defying Latin America’s shift toward monetary easing as policymakers fret that inflation isn’t cooling fast enough.

Twenty three analysts surveyed by Bloomberg expect policymakers to keep the rate at a quarter-century high of 13.25%. One forecasts a cut of a quarter percentage point, while another predicts a half percentage-point reduction to 12.75%. Finance Minister Ricardo Bonilla, a voting member on the board, is expected to back a cut after having supported the start of easing in September.

Colombia stands out because it has the highest interest rate among inflation-targeting countries in Latin America and also lags regional peers that have started easing. Policymakers had previously raised borrowing costs by 11.5 percentage points over a year and a half. Annual inflation has since eased to 10.99%, but some officials have expressed worries about resistant prices.

What Bloomberg Economics Says

“We expect Colombia’s central bank to hold the benchmark rate at 13.25%. Forward guidance will likely reiterate policymakers are waiting for signs that inflation is firmly on track to fall in line with their target over a two-year forecast before cutting rates”

Colombia central bank Governor Leonardo Villar will announce the board’s decision after 1 p.m. in Bogota. Here’s what investors will be looking for:

December Expectations

Investors will be on the lookout for comments signaling how soon rate cuts may begin. The most recent central bank survey showed economists now see easing kicking off in December after analysts had previously bet on an October start.

Those economists also raised their 2023-end inflation forecasts to 9.59% from 9.48% the previous month, while they also see consumer price growth of 5.32% at the end of next year. Those figures are above Colombia’s 3% target, with a tolerance range of plus or minus one percentage point.

Unlike Colombia, Lation American countries including Brazil, Chile and Peru have already started to ease their monetary policy after reversing post-pandemic inflation surges.

Credibility Risk

Still, central bank co-director Olga Lucia Acosta, the only board member named by President Gustavo Petro, said in an interview earlier this month that the bank could put its credibility at risk if it rushed to cut interest rates.

Policymakers need greater security that inflation expectations are firmly converging to the central bank’s target before easing, she said. Investors will be keen to hear if that view on consumer price forecasts remains unchanged.

The bank’s board voted 5-2 in September to keep rates steady, with the minority group favoring a reduction due to slowing economic growth concerns.

Indeed, economic indicators such as retail sales and manufacturing are showing the nation’s activity is deteriorating. Gross domestic product expanded by 0.3% in the second quarter from a year earlier, and the central bank will publish its new forecasts this month.

The most recent monetary policy report showed central bank’s economists expect GDP to advance 0.9% this year after a 7.3% expansion in 2022.

Source: BNN Bloomberg