Colombia’s Central Bank Keeps Interest Rate Steady

By Luis Jaime Acosta

BOGOTA (Reuters) – Colombia’s central bank held the benchmark interest rate at 9.25% on Friday, as predicted by the market, amid growing fiscal uncertainty and rising inflation expectations.

The decision was supported by four policymakers on the seven-member board, while one voted for a 25-basis point reduction and two for a 50-basis point cut.

The board stated, “The decision maintains a cautious monetary policy stance that recognizes the new risks identified regarding inflation’s convergence to the target, while continuing to support the recovery of economic activity.”

The government’s recent suspension of the fiscal rule, designed to protect public finances, and an increase in its deficit target have raised concerns in a market already apprehensive of President Gustavo Petro’s policies.

The government is now targeting a 7.1% deficit of the GDP for 2025, up from the previous estimate of 5.1%.

The board noted that this increase “poses a challenge to the sustainability of public finances and reduces the room for maneuver to ease monetary policy.”

Ratings agencies S&P and Moody’s cited weaker fiscal performance for their one-notch downgrades of Colombia’s debt ratings on Thursday.

Finance Minister German Avila, representing the government on the board, supported a 50-point cut, stating, “The government does not share this decision, it believes it goes against the efforts to boost economic growth.”

The finance ministry has raised its 2025 inflation estimate to 4.5%, aligning closely with the central bank’s prediction of 4.4%, and above the long-term target of 3%.

Although inflation declined more than expected in the 12 months leading to May, dropping to 5.05%, the board mentioned it has remained elevated due to persistent food and service prices, predicting a longer timeline to reach 3%.

The bank’s technical team increased its economic growth prediction for the year to 2.7%, up from 2.6%.

A majority of analysts in a Reuters survey last week expected the rate to hold, anticipating a cut either in July or September. The bank board surprised the market in April with a 25 basis point cut following a pause in the reduction cycle that began in December 2023.