Colombia’s Finance Minister Germán Ávila abandoned a meeting of the board of the central bank (Banco de la República), on April 1 in protest over two decisions by the institution: the release of an internal document without prior consultation, and a 100-basis-point increase in the benchmark interest rate, which was raised to 11.25%.

According to the finance minister, the disclosure of the document, which involved both institutions and was linked to a draft government decree, constituted an “abuse.”

He also described the rate hike, the second so far this year, as “irresponsible and inconvenient,” arguing that it contradicts the government’s economic growth strategy.

The central bank said the decision was approved by a majority of its board: “four members voted in favor of the increase, two supported a 50-basis-point cut, and one proposed keeping the rate unchanged.”

The bank justified the move by noting that inflation stood at 5.4% in January and 5.3% in February, above the 5.1% recorded at the end of 2025. It also warned of external risks, including the impact of the conflict in Iran on the global economy, which could increase the cost of key imports such as gas and fertilizers and add to inflationary pressures later this year.

It remains unclear whether Ávila’s withdrawal from the board will be temporary or permanent, but the episode marks a new point of institutional tension that could influence the direction of monetary policy in Colombia in the coming months.

Clash between monetary policy and government strategy

Ávila criticized the decision, saying the central bank is overlooking the country’s economic progress. “The decision taken by the central bank is repetitive and continues to ignore the national government’s efforts to ensure fiscal stability and sustained economic growth,” he said.

He also argued that the increase is disproportionate compared with global trends. “There is not a single economy in the world proposing a 200-basis-point increase in the benchmark rate in the current global context,” he said, referring to the fact that the bank had already raised rates by 100 basis points in February, meaning a total increase of 200 basis points in just four months.

The government maintains that macroeconomic conditions remain stable, pointing to controlled inflation, a relatively stable Colombian peso (COP) against the dollar, declining unemployment and solid productive growth, and argues that tighter monetary policy is unnecessary.

Debate over central bank independence

The Finance Ministry said the minister’s decision to leave the meeting does not seek to challenge the independence of the central bank, but rather to highlight the need for its decisions to align with the country’s economic and social reality.

However, the move has raised legal and institutional concerns. Central bank chairman of the board, Leonardo Villar noted that the finance minister has a constitutional obligation to attend board meetings, as he “not only represents the government but also lead the meetings” said in a public interview broadcasted by media outlet like La República.

He warned that an indefinite absence could amount to a breach of legal duties and urged President Gustavo Petro to appoint an “ad hoc” delegate if the minister decides not to attend future meetings.

Experts say the minister’s absence could affect the board’s ability to make decisions. According to Andrés Pardo, former deputy finance minister and head of Latin America macro strategy at XP Investments, in an interview with Valora Analitik, “current regulations require at least five members, including the finance minister or a delegate, for the board to deliberate and decide”.

This could mean that, without his presence, the central bank may be legally unable to adopt monetary policy decisions.

Economic impact

The rate increase could have significant effects on the real economy. According to the Finance Ministry, a move of this magnitude could slow economic recovery, increase borrowing costs for households and businesses, and raise debt servicing costs.

Small and medium-sized companies, construction, retail and tourism are expected to be among the most affected sectors, along with households holding variable-rate loans.

Lower-income groups could face the greatest impact, as reduced purchasing power and tighter access to credit may deepen economic inequality.

While this was slightly better than expected, the positive difference is likely not enough to radicalize the central bank into taking more drastic measures at the end of the month. Fedesarrollo continues to anticipate a year-end CPI rate of of 5.51% — but we are already at 3.34% year-to-date.

The complications related to El Niño may be disappearing into the rearview mirror, but La Niña is now on the horizon — and won’t be helpful when it comes to inflation. Even thought we have been falling for 13 straight months — and 12 months ago we were at 12.82% — Banco de la República is behind the curve.

Along the same lines, Fedesarrollo’s forecast for an year-end overnight interest rate of 8.25% is also looking optimistic given the conservative nature of the central bank.

El Niño, as mentioned, is gradually leaving us. This has helped energy reservoir levels rise from 28.0% to 34.5%, and while water rationing continues in Bogotá, consumption has fallen. Next up, also as mentioned, is La Niña and the expectation for heavy rainfall.

In terms of economic inflows, international tourism continues to boom, with 1.6 million visitors arriving in the first quarter of 2024, an increase of 7.6%. While Bogotá had the most visitors, there is no question that Medellín and Cartagena are drawing the most tourists. The main visitors thus far in 2024, accounting for 26.6%, are from the United States. Given the criminal news emanating from Medellín, in particular, in recent months, most are welcome but many are not — including those disparaging referred to as the “passport bros.”

Ecopetrol’s first quarter results were released this week as well, and thye were, as expected, negative year-over-year. Production was slightly down, however it was the decrease in the price of Brent oil and the stronger performance of the Colombian peso that did the damage.

Ricardo Roa, chief executive officer of Ecopetrol, has been under some political pressure recently, but he has no intention of stepping down. Instead Roa is concentrating on 2025 and the anticipated shortfall in gas supply. Venezuela is prepared to sell at a favorable price — but first the pipeline needs a lot of work. Additionally, given that the United States has reimposed its embargo, permission will need to be sought from Washington.

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Banco de la República cut rates by 50 bps, to 12.25%, on Friday, but despite Chairman Leonardo Villar’s words expressing the “magnitude” of the cut, the simple fact is that:

1. It was the absolute minimum they could have done
2. It was not enough in the eyes of either Finance Minister Ricardo Bonilla or the private sector
3. The central Bank remains the single biggest handbrake in Colombian economic expansion.

The committee almost chose to ignore their own most recent analysis, which lowered the 12-month and 24-month inflation estimates to 4.7% and 3.5%, down from 5.7% and 3.8%, respectively. On top of this, according to almost every document you care to read, El Niño has not been as fierce as expected, despite some glorious suntans, and that we are in the final throughs of the drought.

Despite the central bank’s obstinacy, JP Morgan published an upbeat economic report suggesting that first-quarter GDP will rise 4% and that 2024 will total 1.6%, which is at the top end of the range. This would be supported by employment data that has remained robust despite high interest rates badly impacting investment, as well as the housing and automotive sectors, among others. That said, try to find a parking space at any given shopping mall — good luck!

The other talking point last weekend was the ongoing dispute around the government and its tight hold on the budgetary purse springs, especially the 4G infrastructure projects. Colombian President Gustavo Petro’s team is watching the pennies, a fact that hasn’t upset the ratings agencies — but has caused disgruntlement in the regions, especially Antioquia and Medellín.

The 4G projects are 95% finished. But due to overspend, Petro is required to send extra funds — and he hasn’t. As of yet.

The government says the money is coming. But former President Álvaro Uribe, who is ideologically juxtaposed to Petro, isn’t waiting. He has called for Antioquia to raise approximately $250 million USD, take over the 4G projects, and complete the job. Without getting into the political weeds, this is less about 4G projects than political jousting and point-scoring between Bogotá and what is referred to as the Federalist wing in Medellín. Beyond all of that, the legal complexities of such a move must be immense.

It’s a sideshow — but at least an interesting one!

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Banco de la República left interest rates at 13.25% (with 5-2 vote — and an angry Ministry of Finance), a terminal rate that needs to come down ASAP. The cut doesn’t need to be radical but at least signal that the easing cycle has begun.

As if to emphasize the ongoing damage, National Business Association of Colombia (ANDI) and FENALCO reported October car sales dropped 38.8% year-over-year. We await October inflation data next week, and if it is even slightly positive the central bank has to surely upgrade their November “gathering” meeting to a “decision” meeting (as opposed to waiting until December to cut rates).

The Fuel Price Stabilization Fund (FEPC) deficit (aka, fuel subsidies) will still exit 2023 at $5 billion USD — a $750 million USD increase that will eat all the tax reform gains. Diesel represents 80% of that deficit, and there will be a battle royale with transport companies in 2024 as diesel prices are set to rise.

National Administrative Department of Statistics (DANE) reported September unemployment data, and while year-over-year job creation dropped to 770,000, both the urban (9.6%) and national (9.3%) rates were the lowest for this month since 2016. Also, encouragingly, for the first time in years, unemployment for women fell (from 11.8% to 11.3%) and rose for men (from 7.4% to 7.7%).

EPM is a Medellín basket case and has become a political football — and should be privatized. It won’t be — as each and every Mayor uses it to their own ends — but there is some good news. After the near-catastrophic events of 2018 (when 115,000 people were put in imminent danger), it is finally, after a few billion extra dollars, coming on stream. Turbine 3 and 4 were activated last week and the 1,200 MW surge helped drive spot prices down from $1,479 to $371/kWh. And there is still more to come.

Also contributing to the price decrease (during a period when the experts initially said El Niño would have arrived by) are heavy rains, which have pushed reservoir levels to 72.8%, according to XM.

The central bank needs to take these factors into account. El Niño is one of the reasons (due to energy prices being so correlated to hydroelectric power) that the committee are worried about CPI. They need to file that concern under “unnecessary.”

The markets this week have been quiet.

The Colombian peso initially surged on local election results, but then gave that up after the FOMC comments following its decision to hold interest rates steady on Wednesday in the United States — before again looking at 4,000 to $1 USD once again yesterday.

On equities there was little, although we did have the data flow for October. Still, there were few radical moves. As the COLCAP dropped 2.9%, overseas funds were the largest volume participants (32.1% as they sold a net $14 million USD), while local brokers were the largest buyers.

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That number was driven by the public sector where Q1 Civil Works activity dropped by 14.9%, according to DANE. This followed a Q42022 decline of 12.8% in the sector, which was driven by fewer roads, tunnels, runways, and bridges. The rest of the GDP data was solid enough with Finance (+22.8%) and Arts/Entertainment (+18.7%) as the main drivers.

Import data for March was also down 16% YoY, per DANE, but at $5.85 billion, this was still above estimates. And with exports continuing to struggle, we consequently saw the Trade Deficit above just above $1 billion, which was $200 million above estimates and twice the last reading. All four sectors (Agriculture, Combustibles, Manufacturing, and Others) were down YoY. The main drivers were Oil/Derivatives (-38.7%), Chemicals (-22%), Manufactured Goods (-26.6%) & Transport (-8.5%).

Finally, again from DANE, the Economic Activity NSA for March came in at 1.6%, above the 1.3% anticipated but below the 3.0% registered for February (although that was also revised down to 2.4%).

If we add to the mix Bancolombia reporting another YoY decline in consumption — and in fact most every other macro indicator — one again is left shaking their head as to what the central bank saw two weeks ago when it raised rates to 13.25%.

Away from the macro data, we saw the pleasing sight of food retailers, including Grupo Éxito and Olympica, cutting prices on large baskets of staple goods following an appeal by President Gustavo Petro. Gustavo may have his critics, but it won’t be those who are paying less for their food or have lower energy bills or even have seen their loan repayments come down. On Thursday, we even had the EPM CEO discussing an energy price freeze in order to help CPI come down. All these areas have lowered prices/interest rates after direct intervention by President Petro.

Meanwhile, the president’s health reform, despite negative headlines, is crawling through Congress, article by article. However, how the final version will look or impact Colombia is hard to tell.

All this despite the U Party joining the Conservative Party in withdrawing their support from the coalition. The labor reform saw Ricardo Bonilla, head of the Ministry of Finance and Public Credit, stating to Congress that Colombia’s long-term unemployment rate would be above 10% — while central bank head Leonardo Villar, addressing the same body, said the labor reform would hurt job creation.

Amid all this, the markets have been quiet.

The Q1 results season has continued broadly positive, but equity volumes remain anemic with the COLCAP dropping 1.9%. The peso has also had a quiet week (+0.7%) with little in terms of movement — a refreshing change.

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The YoY Q1 number was 3.0% versus a consensus expectation of 3.5% — exactly as suggested by the survey from the Colombian central bank, Banco de la República. The QoQ number of 1.4% actually beat the estimate of 1%. There was an adjustment downwards in the FY2022 reading from 7.5% to 7.3% — important but still a blowout number.

YoY there was growth in every sector (bar one) with the biggest contributions coming from Finance (+22.8%) and Arts/Entertainment (+18.7%). The one blot was Construction, which fell 3.1% YoY and this was largely explained by Civil Works. That Q1 Civil Works data was already released and there was a 14.9% reduction YoY (this follows on from -12.8% in Q422). The main category here contains roads, runways, tunnels and tunnels, which dropped 22.9%. There were a couple of areas of growth, Ports (+27.8%) and Gas Pipelines (+34.7%), but they are very small and don’t move the needle.

DANE also released the Economic Activity NSA for March, which came in at 1.6%, above the 1.3% anticipated but below the 3.0% registered for February, although that February figure has now been revised down to 2.4%. The biggest declines YoY were heavyweight areas such as Commerce (-2.6%), Manufacturing (-0.8%), and Construction (-4.6%).

Later this week, we will also have the Imports (estimated $5.4 billion) and Trade Balance (-$850 million) for March and, with Exports having struggled somewhat, the size of the deficit will be under the microscope.

Banco de la República and Bloomberg will both release their economist surveys during the week.

In terms of the markets, the press and analysts are in agreement: Stocks are cheap on almost any metric you wish to use, the problem is that volumes are in the ICU. The COLCAP is 7.7% lower over the past month, despite already tempting valuations and a results season that thus far is reading well. The Colombian peso, having dropped around 0.6% last week as the dollar surged, is already improving this morning as part of a global bounce against the greenback.

Away from macro data, the Health Reform (he types holding back a yawn) will be on the agenda again, but given the current balance in Congress it is going to be sticky progress for the government. Over the weekend, we again saw Gustavo Petro asking the financial sector to lower some of their key interest rates, this coming amidst some criticism over the central bank’s handling of overnight rates. I am no Petrista, but I concur in terms of the most recent rate increases when compared to the weak macro data that is being presented.

About it for this Monday lunchtime!

Regards,
Roops

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The nation’s economy grew by 2.0% in the third quarter — the best quarter so far this year. But this still lagged the consensus forecast, and most analysts now predict the annual rate to come in below that figure at around 1.8%, which would be just the fourth time in decades that growth has come in below 2.0%, according to the World Bank. (Previous sub-2% years include 2009, 2001, 1999, 1982.)

At the same time, inflation did increase in October, but only slightly to hit 4.05% on a year-over-year basis. While this is above the central bank’s target range of between 2%-4%, the bank said in a statement that it expects inflation to end the year at 3.95% and close 2018 at 3.49%. Bancolombia, the nation’s largest bank, also has forecast inflation to end 2017 below 4%.

Banco de la República noted that third quarter growth was lower than the 2.3% forecast of its technical staff. “The dynamics of the domestic demand were weaker than expected,” it stated, adding that “these figures confirm the persistence of economic growth below its potential.”

The committee’s decision to lower the repo rate was in line with the expectation of Bancolombia. While projects this to be the final cut of the year, it does expect further reductions in the first six months of 2018 depending upon changes seen in other economic fundamentals.

“Our expectation is that the repo rate will end 2017 at 4.75%,” said Bancolombia in a note to investors today. “In this regard it is important to mention that the monetary authority does not rule out further cuts to the interest rate.”

The bank continues to state that, ”we reiterate our expectation that in the first half of 2018, additional cuts will be made to complete the expansive cycle of monetary policy. From 4.75% at the end of 2017, the board will discuss the pace and magnitude of additional cuts that complete the path of cuts, whose terminal level, according to our estimates, would be 4.25% in 2018.”

This is up from a year-over-year rate of 3.97% last month and puts inflation outside of the central bank’s target rate of between 2%-4% for the first time since June.

This minor uptick was expected by most analysts, including those at the central bank and Bancolombia, the country’s largest bank. The central bank has forecasted inflation to end 2017 at 4.07%. Bancolombia has predicted 4.0%. But the rise is projected to be temporary, as the two institutions expect the rate to drop throughout 2018 to close next year at 3.58% and 3.50%, respectively.

The rate is also well below the 6.48% year-over-year rate in Colombia in October 2016.

Monthly price increases in recreation (up 0.31% from September), housing (up 0.22%), and healthcare were the largest factors in the overall consumer price index rise in October.

The ongoing drop in food prices, which spiked for many product categories last year, is the largest segment holding down the overall index. Food prices overall were down 0.24% compared to last month, with carrots (down 19.82%), peas (down 16.28%), and onions (down 11.82%) showing the sharpest declines. Potatoes bucked the trend with an increase of 21.15%.

The Colombian central bank, Banco de la República, has spent the year more concerned with slow economic growth than inflation. As consumer prices have come down from 2016 highs, the central bank committee has continually cut the nation’s key interest rate from a high of 7.75% late last year to the current 5.0%.

After making the unexpected move, the committee, which voted 5-2 in favor of the cut, with the two dissenting voices calling to hold the rate, said in a statement that “this reduction should not be understood as part of a continuous path of cuts.”

In explaining its rationale, the bank’s committee noted an economic growth rate that remains below the nation’s potential. The committee did cite some positive metrics regarding a recovery in external demand, terms of trade, and oil prices. But it is maintaining its underwhelming 1.6% projection for Colombia’s GDP growth in 2017. (The trends for economic fundamentals have been encouraging enough, however, for the central bank to increase its 2018 forecast from 2.4% to 2.7%.)

Such concerns about weak economic expansion continue to supersede worries about inflation, which increased, year-over-year, to 3.97% in September. But this slight increase, from 3.87% in August, can be explained by an increase in food prices, according to the bank, which stated that “basic inflation continued to fall.”

Moreover, the overall inflation rate still remains within Banco de la República’s target range of between 2%-4%. The committee projects inflation to end 2017 just outside that band, at 4.07%, and close 2018 at 3.58%. This is in line with Medellín-based Bancolombia’s forecast of 4.0% and 3.5%, respectively, to end 2017 and 2018.

The committee also continues to expect further reduction in Colombia’s current account deficit. As a percentage of GDP, the current account deficit rate came in at 4.4% last year, and the central bank expects it to end 2017 at 3.7%. This is near the 3.8% projection made this week by New York-based rating agency Fitch Ratings. Banco de la República today said that this downward trend “is expected to continue,” and Fitch also called the government’s target of 3.1% in 2018 “credible.”

Most analysts had projected that the key interest rate would be reduced to 5.0% over the medium term despite expectations that it would remain at 5.25% until at least next month. But Banco de la República “has a history of surprising the market, and today’s decision to lower interest rates by 25 basis points to 5% follows in that tradition,” wrote London-based Capital Economics analyst Neil Shearing in a note to investors. “All 17 analysts in the Reuters survey — including us — had expected rates to be left unchanged at 5.25%.”

Bancolombia, the largest bank in Colombia, had also projected no reduction to be made today. But the financial institution has been anticipating one more cut before year end that would leave the rate at 5.0% at the close of 2017. With two meetings left before year-end — and the central bank asserting that today’s move won’t necessarily represent a “continuous path of cuts” — that forecast may still come to pass.

This expected cut equals the 25-point reduction in July and marks the eighth time in the past nine months that the Banco de la República has taken action. The current cutting cycle has now dropped the benchmark interest rate from a high of 7.75% last November to its current 5.25%.

The Banco de la República’s committee members continue to feel comfortable making cuts in an attempt to spark the economy given the ongoing drop in inflation, which has fallen back within the bank’s target range of between 2%-4%. In July, year-over-year inflation stood at 3.4% — a major turnaround from the 16-year high of 8.97% seen a year earlier.

The bank is still projecting an mild uptick in inflation in the final months of the year, forecasting a year-end inflation rate of 4.16% for December 2017.

Bancolombia, the nation’s largest bank, believes inflation has already begun to rise. It is projecting the August figure to come in at 3.79% before ending the year at 4.2%.

But the larger concerns for the central bank continue to reside with overall economic output in a year when Colombia is likely to register GDP growth below 2% for the first time since 2009. The economy grew by just 1.3% in the second quarter, a figure that was “close to the technical staff’s estimate,” said the bank in a statement.

The Banco de la República stated that its decision to cut the interest rate was impacted by the “weakness in economic activity and the risk of a slowdown beyond what is compatible with the deterioration in the dynamics of income due to the fall in oil prices.”

The bank added that “the dynamics of household spending remained weak,” “gross capital formation growth was low,” and “net exports subtracted more than estimated from growth due to the increase in imports.”

The bank did acknowledge, however, that “the available figures of economic activity suggest that the slowdown of the economy has bottomed out, and that higher growth can be expected during the second half of the year.”

Four of the board’s seven members supported the 25-point cut. Two voted for a 50-point reduction, while one preferred no intervention this month.

Neil Shearing, chief emerging markets economist at London-based research firm Capital Economics, highlighted the importance of two members voting for even deeper cuts. In part for this reason, Capital Economics has predicted that the interest rate in Colombia will end the year at 4.5%, a forecast below the market consensus.

“It’s clear that there is support among some board members for additional policy loosening to help the economic recovery,” he wrote in a note to investors. He added that “none of the board members voted for a 50-basis-point cut at last month’s meeting.”

The 25-point cut in August was in line with Bancolombia’s prediction. The Medellín-based bank forecasts the interest rate to end 2017 at 5.0%. “We reiterate our 5% forecast for the repo rate this year,” stated the bank in an investors note before yesterday’s meeting. “This would occur after two 25-basis-point cuts — one this month and another over the end of the year — depending on the degree of recovery evidenced by the economy in the second half.”