Colombia’s Central Bank Set to Cut Interest Rate Amid Fiscal Challenges and Inflation Concerns
Colombia’s central bank is expected to cut interest rates by 50 basis points in its last meeting of 2024, amid fiscal challenges and an inflation rate that exceeds targets. President Petro’s government faces turmoil with a recent rejection of fiscal reform, prompting necessary spending cuts. Analysts underscore the importance of maintaining a restrictive monetary policy as inflation persists off-target.
On Friday, Colombia’s central bank is poised to convene for its final meeting of the year, during which analysts forecast a reduction of the benchmark interest rate by 50 basis points, resulting in a rate of 9.25%. All 25 analysts surveyed in a recent Reuters poll anticipate this decision, marking the seventh consecutive 50 basis point cut. Wilson Tovar, chief economist at Acciones y Valores, emphasized the importance of maintaining prudent measures given the uncertainty surrounding the Federal Reserve’s actions, the impending wage increase in Colombia for 2025, and ongoing fiscal instability.
President Gustavo Petro’s administration is facing significant fiscal challenges that endanger adherence to the nation’s fiscal rules, aimed at constraining spending to safeguard public finances. Recently, Congress dismissed a proposed $2.7 billion fiscal reform intended to support spending for 2025. Furthermore, the Autonomous Fiscal Rule Committee indicated that Colombia must reduce spending by 40 trillion pesos this year, followed by an additional cut of 52 trillion pesos next year.
Colombia’s inflation rate has been alarming, closing at 5.20% as of November, exceeding the central bank’s target of 3%. Laura Pirajan, chief economist at Scotiabank Colombia, pointed out, “Although inflation has corrected, it remains outside the target range and the central bank wants to ensure convergence in 2025, so it must continue to have a restrictive rate.” Since initiating its monetary policy shift in December of last year, the central bank has decreased its benchmark interest rate by a total of 325 basis points.
The Colombian central bank’s interest rate policy is influenced by a combination of domestic fiscal challenges and global economic uncertainties. The government under President Gustavo Petro is navigating significant fiscal hurdles, including a failed fiscal reform proposal and the expectations of substantial spending cuts. The central bank’s decisions are further complicated by inflation rates that exceed their target, necessitating a careful balancing act to maintain economic stability. Additionally, potential changes in global monetary policy, particularly from the Federal Reserve, add another layer of complexity to Colombia’s economic landscape.
In conclusion, the upcoming meeting of Colombia’s central bank board is critical as the country grapples with fiscal challenges and inflation control. Analysts universally predict a 50 basis point interest rate cut, which would reflect the bank’s ongoing strategy to support the economy amidst significant uncertainty. The backdrop of fiscal reform rejections and rising inflation rates necessitates a cautious approach by the central bank, with sustained vigilance towards both domestic and international economic factors informing future policy decisions.
Original Source: www.brecorder.com
