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Colombia Monetary Policy December 2024

Colombia: Central Bank cuts rates further in December

Bank unexpectedly slows the pace of its loosening cycle: At its meeting on 20 December, the Board of Directors of the Central Bank of Colombia (Banrep) decided to reduce its policy rate by 25 basis points to 9.50%. As a result, Banrep slowed the pace of its monetary policy easing cycle, a decision which took markets by surprise, having delivered four consecutive 50 basis point cuts since February. The move was once again not unanimous; one of the Board’s seven members preferred a 50 basis points cut, and another voted for a 75 basis points reduction.

Sluggish economic activity motivates cut: The cut aimed again to stimulate economic activity: Though improving from Q1’s near-stagnant reading, economic growth undershot its pre-pandemic 10-year growth average for the eighth consecutive quarter in Q3. That said, Banrep noted that inflation is expected to take longer than it forecast in October to converge to its 2.0–4.0% target range due to a hike in minimum wages and a weakening currency. This, paired with rising inflationary risks, dissuaded a larger-sized cut.

Easing to continue ahead but at a slower pace: In its communiqué, the Bank struck a more hawkish tone than in October, and in a subsequent statement, Governor Leonardo Villar hinted that the easing cycle is likely to slow ahead.

Our panelists pencil in upward of two percentage points of cumulative reductions for 2025. That said, given the unexpected nature of the Bank’s decision in December, our analysts could raise their end-2025 interest rate forecasts in the coming months. A further deterioration in the country’s fiscal metrics is an upside risk to rates, while the size and timing of U.S. tariffs under President Trump plus government interference in monetary policy are key risk factors.

The Bank will reconvene on 31 January.

Panelist insight: Goldman Sachs’ Santiago Tellez commented:

“Owing to a negative output gap, and a still very restrictive stance, we continue to expect consecutive but moderate cuts in 2025, but see the risks to this forecast as clearly skewed towards the possibility of fewer cuts given recent external and domestic developments.”

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