The Board of Directors of the Banco de la República decided by majority to reduce the interest rate by 50 basis points (bps) monetary policy at 10.75%.
(Further: Banco de la República lowered interest rates by 50 bps and left them at 10.75%).
Five directors voted in favor of this decision and two voted for a 75 bps reduction..
The manager of the issuer, Leonardo Villar, said that factors such as the fact that annual inflation in June remained stable at 7.2%, in line with expectations, were taken into account.
In addition, annual inflation excluding food and regulated items fell from 6.1% to 6.0%, annual food inflation increased further from 4.4% to 5.3%, due to climatic phenomena, while inflation for regulated items fell from 13.7% to 13.3%.
He added that in July the monthly survey applied by the Issuer to the analysts reported in the median some Inflation expectations remained stable and those derived from public debt markets fell across all maturities.
(Read: Interest rates: bets on further cuts, despite Banrep’s caution).
Villar said that GDP would have continued its recovery path during the second quarter, with uneven performances between sectors and the technical team predicts that economic activity levels would continue to recover to reach a growth of 1.8% in 2024.
External financing conditions became more relaxed amid expectations of more accommodative monetary policies by the main central banks of advanced economies.
(See: Does the labor market influence a country’s monetary policy?).
He added that The decision taken provides a new impetus to the recovery of economic growth and maintains the required prudence, given the risks that remain regarding the behavior of inflation.
Interest rate
The Issuer’s Manager He assured that inflation would continue to decrease in the following months and at the end of the year it will close between 5.5% and 5.9%, and said that in any case we have to wait for the information that comes out.
Finance Minister Ricardo Bonilla said that it will be a challenge to have a lower inflation rate in the following months and said that “the market expectation is to close the monetary policy rate at 8.5% and we have to look at that, because the inflation challenge is 5.5%, so the real rate would be 300 points. Today, the rate is 357 points.”
Discussion on the neutral rate
On the subject of the neutral interest rate, Villar said that it has been reviewed and there are elements that suggest that it should be raised following Colombia’s loss of investment grade in 2021.
(Further: Banco de la República rules out having a retail-type central bank digital currency).
“There is an international discussion that says that the natural and neutral rate must be raised. We do not enter into the discussion, but a neutral Colombian rate has to do with the risk premium of the Colombian economy and we say that it is in the order of 2.5%, when in the past it was 2%.“.
He warned that inflation risks always exist and must be monitored along with their determinants and even random elements, but The main factors such as the El Niño phenomenon have been mitigated and those that are foreseen with the La Niña phenomenon have an expected magnitude that is lower than what was believed in the past. compared to what it could be for inflation. “The implications would not be so strong, but it is a climatic phenomenon about which there is no absolute certainty.“, he emphasized.
Holman Rodriguez Martinez
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