Central Bank pauses loosening cycle in June

Hold meets market expectations: At its meeting on 27 June, the board of directors of the Central Bank of Colombia (Banrep) decided to maintain its policy interest rate at 9.25%. As a result, Banrep paused its monetary policy easing cycle following cumulative rate reductions of 400 basis points since December 2023. Still, rates remain at some of the highest levels seen in the past decades. While the move was in line with market expectations, it was not unanimous; One of the seven board members voted for a 25 basis point cut, while another two favored a 50 basis point reduction.

Widening budget shortfall limits space for cuts: The Central Bank’s decision was largely driven by the country’s deteriorating fiscal metrics: Dwindling budget revenues drove the government to temporarily suspend the fiscal rule earlier in the month and raise its fiscal deficit goal by 2.0 percentage points. Regarding inflation, the Banrep highlighted persistent in food and services price pressures that have kept both headline and core inflation significantly above its 2.0–4.0% target band since mid-2021. Moreover, inflation expectations continued to outpace the target midpoint, which policymakers linked to a slower-than-previously-expected convergence of inflation toward the target. Meanwhile, the Bank upgraded its forecast for 2025 GDP growth to 2.7% from 2.6% following a stronger-than-forecast showing in Q1, which will have given the Banrep more room to keep monetary policy tight.

Uncertainty looms over further rate reductions: In its communiqué, the Bank struck a more hawkish tone, determining that fragile fiscal sustainability, “limits the scope” for future cuts. Still, a government-driven dovish shift remains a possibility: Three of the board’s seven members were handpicked in Q1 by President Gustavo Petro—as well as Finance Minister German Avila—who has long criticized the Bank for keeping rates elevated. In particular, Avila opposed the hold decision in a subsequent statement, stating it was detrimental to the government’s efforts of boosting the economy. As a result, all of our panelists still expect further cuts by December. That said, the spread on the end-2025 rate forecast remains wide at 6.50–8.75% given elevated uncertainty tied to a deterioration in the country’s fiscal metrics and a more adverse trade backdrop.

Panelist insight: Analysts at Itaú Unibanco commented: “With slower disinflation and a deteriorated fiscal scenario, risks tilt towards several pauses in the cutting path ahead. Additional price uncertainty stems from next year’s minimum wage negotiation (yearend) and higher labor costs resulting from the labor reform. The recent downgrades from Moody's and S&P also support caution. […] We see a year-end rate of 8.5%, with risks tilted towards fewer cuts.” Credicorp Capital’s Daniel Velandia and Diego Camacho said: “We are now more conservative and expect the repo rate to stand at 8.50% by year-end (we had 8% before). […] The combination of the non-negligible recovery of domestic demand, an inflation still way above the 3% target, and, particularly, the tough fiscal backdrop should mean a more gradual rate-cutting process than expected before.”

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