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This Tuesday, in the third meeting of 2024, the board of directors of the Bank of the Republic made the determination to lower its interest rates for the fourth time since its monetary policy adjustment began in September 2021, in response to the economic challenges that imposed the pandemic.
With this determination, the interest rates of the Colombian central bank remain at 11.75%, which represents a decrease of 50 basis points in the indicator, an adjustment of equal proportion to that of the March decision.
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The determination was made by majority: five co-directors voted for the announced reduction, one did so for a reduction of 75 basis points and one more did so for a reduction of 100, according to Leonardo Villar, manager of Banco de la República.
“The decision is not unanimous, but there is unanimity regarding following the path of reducing rates. “We have not achieved unanimity in looking in depth at the needs of economic recovery and that is why we have not achieved a joint decision,” said the Minister of Finance, Ricardo Bonilla.
The drop in rates was widely expected by analysts. The decline was in line with what the majority of respondents expected in the Fedesarrollo Financial Opinion Survey, as well as the projections of analysis centers such as the Corficolombiana economic research group, for example.
“The majority of members of the Bank’s board react to the situation of the FED (Federal Reserve) that has left the movement of rates in different central banks in unfavorable conditions,” Bonilla added.
Inflation offers slight respite
The rates of the Bank of the Republic must be read in terms of inflation. That is, one issue goes hand in hand with the other.
The decline that the Bank began in December of last year reflects, in turn, the path that inflation has been taking in Colombia, which at this point has accumulated a year of consecutive declines, which allows us to speak of a clear downward trend. , not only currently, but towards the most immediate future.
The recent moves of the Bank’s board of directors reflect this a bit: an inflation that seems to be under structural control and, with it, a progressive relaxation (and taking a little more speed) in the entity’s monetary policy.
From its highest point, in March 2023 (13.34%), the CPI reached 7.36% in its annual variation in March 2024. And inflation without food or regulated items at 6.8%.
“These records consolidate the downward trend in price variation observed in 2023. The baskets of goods and food are the ones that have contributed the most to this reduction in annual inflation,” Banrep detailed.
This is a notable improvement, without a doubt. Not only does it keep the indicator in the single digit range, but it also implies a very positive behavior in key categories such as food, whose decline practically explained the good result with which the CPI closed in 2023 for Colombia and the downward trend which is still seen in 2024.
The inflation expectations of the analysts surveyed monthly by the Banco de la República remained stable at 4.6% and 3.5% in one and two years in the median of the sample, while those derived from the public debt markets most of them decreased, although their levels remain above the goal.
In terms of growth, the bank projects growth of 1.4% in 2024, a figure that represents an upward revision compared to the forecast with which it began the year (0.8%). In addition, the projection for 2025 remained at 3.2%.
“This review incorporates the positive performance of some activities in the primary and tertiary sectors (services) during the first months of the year, as indicated by recent data from the Economic Monitoring Indicator (ISE),” the Bank stated.
Finally, the decision of Banco de la República took into account the external context that has been affected by the economic circumstances in the United States that show persistent core inflation still above the target, a tight labor market and upward revisions in economic growth. This has increased medium and long-term interest rates in global markets.
What is the role of interest rates in the economy?
To understand the role of interest rates throughout the economy, as well as their impact on people’s daily purchasing decisions and possibilities, it is useful to think of this scenario as a series of dominoes. The first domino is the decision to raise and lower rates and from there a chain begins that ends on the supermarket shelf or in the mortgage loan office of a bank.
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The central bank of a country is known, among other terms, as the bank of banks because the entity lends money to the other institutional actors in the financial system. And, among other factors, it is because of this role that its interest rates end up being key for the entire economy: if the Issuer raises its interest rate, other banks will see financial pressure to lend to citizens and companies at higher rates as well. .
A rise in interest rates has the theoretical intention of making money a little more scarce and making credit more expensive. And these two elements have, in turn, the possibility of influencing people’s consumption decisions: if credit becomes more expensive, it is better not to go into debt to buy that motorcycle, car, or house.
These decisions, collectively speaking, can put a brake on demand, which in turn can end up lowering the prices of some goods and, in that way, pushing down inflation.
