The Rate Cut Conundrum Facing Colombia’s Central Bank

This coming Friday, the committee of the Colombian central bank will sit down and they have a massive dilemma on their hands.

Reflecting the strong institutions of Colombia, the Banco de la República has for the past six months ignored the carrion calls to stop raising interest rate — or even to lower rates — as they continued the battle against rising inflation, which was largely against the country’s control.

But what now?

Colombia’s Finance Ministry and the National Business Association of Colombia (ANDI) have spent weeks and months asking for rate cuts. Will they get what they want?

By June, the consumer price index (CPI) seemed to have been controlled, but the July and August readings, while coming down, have been higher than expected.

But, the central bank, at the same time, has choked off the economy.

Wherever you look at the data from the National Administrative Department of Statistics (DANE) — imports, retail sales, manufacturing production, new home sales, construction, and GDP — we are slowing like a hamstrung athlete.

Colombia’s Finance Ministry (MinHacienda) and the National Business Association of Colombia (ANDI) have spent weeks and months asking for rate cuts. Will they get what they want?

My guess is no. But, perhaps, they need to take a punt and cut a little bit, thereby sending a message to the markets.

One concern has been the arrival of El Niño, which would unquestionably drive prices upwards. We have already seen the impact on energy costs on the coast, but September was the arrival date for the phenomena and, as of yet, things are cooler than expected. The last forecast from IDEAM was a 90% probability of El Niño, but with no real understanding of how strong it will be. Perhaps it will be weaker than expected — although that could be the heart talking.

There will be much chatter leading up to Friday. During Friday. And afterwards.

Hopefully they will cut. But the committee has years of track record as overtly conservative — a fact reflected in last week’s Fedesarrollo survey, which raised its year-end 2023 Overnight Rate estimate from 12% to 12.50%.

Until then, it’s a case of wait and see.

Photo: Banco de la Republica, the central bank of Colombia.

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