Colombian Central Bank Cut Interest Rates But It Was Way Overdue (and Too Little Too Late?)

The main event of the week was the 25 basis point cut in interest rates to 13% by Banco de la República. The move was so far overdue — and was so small — that it has been forgotten already. It is of course a welcome message, but isn’t big enough to shock the economy into life.

Photo: Banco de la República, the central bank of Colombia, in Bogotá. (Photo credit: Camilo Sanchez)

Two other questions arose. Firstly, as it was a 5-2 vote, which pair of directors are not capable of reading economic data and need removing? Secondly, how fast will rates now fall as we enter 2024?

Inflation has been stubborn in coming down. While food prices have started to ease, against expectation, there are concerns around both gasoline and energy prices, which continue to rise. On top of that, El Niño has now arrived and the country is beginning to dry out. The committee alluded to this in their press release.

Moreover, real sector data from the National Administrative Department of Statistics (DANE) (which is beyond the reading age of two directors) suggests the central bank has been sluggish in cutting rates. Most expected a first reduction in September, but the committee’s conservative nature meant they waited as long as possible. They did at least refer to October’s economic activity number (-0.4%).

Next up is the December inflation number, due out in early 2024. In the meantime, we at least have a signal from five of the central bank committee that they understand that rates need to come down.

In other news …

• Fitch Ratings are predicting a tough 2024 for the corporate sector in Colombia due to the continued restrictive conditions of the economy, which lead them to estimate a 2024 GDP growth of 1.2% — a number that does appear overtly conservative but, given the delay in cutting rates, perhaps wholly possible.
• The minimum wage discussions broke up again with no agreement. The workers are asking 18%, plus extras, while the employers have offered no proposal, as it’s impossible to calculate a figure given the theoretical increased costs that will come with the Labor Reform. The figure has to be higher than inflation, which is expected to close 2023 at ~10%m so the expectation is growing for a 12% number.
• October imports fell again by 12.3% to $5.37 billion USD. While it was one of the better numbers over recent months, it was dragged down in the main by manufacturing (and in particular vehicles). The $960 million USD deficit was down from $1.5 billion USD a year ago — but remains of high concern. Touching on this, the ANDI – Asociación Nacional de Empresarios de Colombia is expecting car sales of 180,000 this year — well below the 262,000 in 2022.
• The other number from DANE was economic activity for October, which dropped 0.4% YoY.
• The Colombian peso remains solidly below 4,000 to $1 USD in the main due to US macro data — but no doubt by the fact that the authorities are expecting record $10 billion USD in remittances in 2023.

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