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Colombia Monetary Policy December 2023

Colombia: Central Bank finally begins to cut rates in December

At its 19 December meeting, Colombia’s Central Bank (BanRep) opted to reduce the benchmark interest rate by 25 basis points to 13.00% from a near 25-year high of 13.25%. Five board members backed the decision, while two voted for rates to be kept steady. The cut was the first in three years and followed a cumulative 1,150 basis point increase since September 2021.

In making its decision, the Bank pointed to four factors that it said would help it reach its 3.0% inflation target. Firstly, inflation has traded downward, coming in at the lowest level in 17 months in November. Secondly, expectations for medium-term inflation remained stable over the preceding month at the Bank’s 3.0% target. Thirdly, economic activity continued to weaken in October, reducing upside pressure on inflation. Fourthly, the Fed’s dovish December meeting suggests U.S. rates will fall quicker than earlier expected, boosting the Colombian peso and reducing the cost of imports.

On average, our panelists expect the Bank to chop rates by 475 basis points by the end of this year. Persistent inflation is in large part due to elevated commodity prices and should ease in the medium run in line with lower oil and food prices. Inflationary risks, which are tilted to the upside, include the El Niño weather pattern—due to its impact on commodity prices—as well as the government’s recent 12% hike in the minimum wage.

The Bank’s next meeting is set for 31 January.

Analysts at Itaú Unibanco said:

“A gradual easing cycle process is expected. With clearer signs that the domestic demand adjustment is unfolding more swiftly, the inflation convergence will likely advance despite still significant supply-side pressures. However, with inflation expectations still well above the target, a gradual rate cut pace is expected during 1Q24.”

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