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That a Government asks the Bank for action regarding rates is anything but new. But at this point, criticism from the national administration, as well as from different productive sectors, has become almost routine, asking for more speed in the decrease in interest rates.
For example, at the recent banking convention (held in Cartagena at the request of Asobancaria), lowering interest rates faster was one of the bankers’ requests.
At the time, Luis Carlos Sarmiento, president of the board of directors of Grupo Aval, assured that the Issuer is “exaggerating” in keeping the real interest rate so high with the argument of a possible resurgence of inflation.
The call was soon joined by President Gustavo Petro, who maintained that there is a “cornering” of the State and the private sector because capital is in trouble. “The way is for the Bank of the Republic to lower the interest rate. “We already have the worst financial system in Latin America.”
And on the criticism side was also Ricardo Bonilla, Minister of Finance, who stated that the real rate is becoming an “obstacle” to economic recovery, because it makes financial closures of projects difficult.
The path of interest rates
By this point in history, the Bank has already advanced four consecutive cuts: 25 basis points in the first two and 50 basis points in the next two.
These movements occurred after 14 consecutive increases, which started in September 2021, when the post-pandemic inflationary shock was already beginning to wreak havoc in Colombia and the rest of the world.
And although there has been an increase in the speed of the decreases, between the first two and the last two, one of the most popular words when talking about interest rates in Colombia is caution.
During the same banking convention, Leonardo Villar, manager of the Bank of the Republic, said that although analysts and personalities have advocated for a more accelerated decline, “caution has benefits” to prevent an early decline from driving inflation again, with everything that that implies for the economy.
Although inflation has been reduced by more than six percentage points in the last year, Villar recalled that it has done so more slowly than in other countries and that “2024 will be the fourth consecutive year in which we do not meet the goal.” But he also gave a piece of reassurance by confirming that “the worst and most painful of the adjustment process is now behind us.”
Now, talking about interest rates is also talking about inflation.
Villar’s caution, and if anything, suspicion, could be justified when analyzing the inflation data for May (the most recent), when the indicator stood at 7.16%.
The data is positive, if one takes into account that a year ago, the CPI was at 12.36% and barely showed the first signs of decline after reaching its peak in March 2023.
But, at the same time, in its monthly behavior, inflation remained at the same level as April of this year, with 0.43%.
The data, although it was in line with the expectations of analysts consulted in the Banco de la República survey, is a little worrying, since since the peak in March of last year, the CPI had shown continuous reductions, even if they were slight (but reductions equal).
At the time, Camilo Herrera, president of Raddar, a firm that measures the consumption of Colombian households, assured through his X account (formerly Twitter) that “the fall in inflation is slowing, as expected, the blow of food and ultra-processed foods passes its collection bill.”
Once the figure was known, Minister Bonilla said (with a somewhat more optimistic vision) that “We have 14 months of inflation control in the country. We ended with a cumulative of 7.16%, which coincides with that of the previous month. “We are in the process of continuing to lower it.”
The Consumer Price Index has been twisting its arm, but its reduction has been registering a kind of deceleration.
In this scenario there is positive news and others not so much.
On the positive side, we find that, at least from a monthly perspective, the weight of electricity in inflation is moderating, with an increase of 0.78%, below what was recorded last year and the peaks achieved in 2022.
On the worrying news side, there is the impact that rents continue to have on the CPI and, incidentally, on the pockets of Colombians.
From an annual perspective, accommodation (with special emphasis on rentals, according to Urdinola) represents almost 3 percentage points of the 7.16% that the CPI had for May. This is the highest contribution among the items monitored by DANE and more than doubles the second category on this list, which is transportation (with a contribution of 1.20%).
So where are interest rates going in Colombia?
The Government’s most recent projections indicate that, by the end of this year, inflation should close at 5.3% and by 2025 it should already be at 3% (which is the goal of the Bank of the Republic), a level at which it should maintained until 2035, according to the modeling of the Medium Term Fiscal Framework.
The consensus among analysts is that the Bank will make a new decision to lower its rates. The question is how much, how quickly will this descent take place.
For the majority of those consulted in the Fedesarrollo Financial Opinion Survey, between the decisions of June and July, the indicator would reach 10.50%, which would indicate an acceleration in the decline compared to the decisions that have been taken this year.
For their part, the analysts consulted in the Banco de la República’s own survey expect that at this week’s meeting, the Issuer’s committee will reduce interest rates again by 50 basis points, maintaining the pace that has occurred in recent years. two decisions.
