During the two years of the pandemic, the Banco de la República has moved interest rates down 2.5 percentage points and up 3.25 points, although this last trend has not ended and more hikes are expected in the coming months to control inflation expectations.
(The Banco de la República increased interest rates to 5%).
From March to September 2020, the Issuer raised its main rate from 4.25% to 1.75%, while from September 2021 to March this year it rose to 5%.
With yesterday’s increase of 100 points (one percentage point), they are already twice in a row this year that the Issuer increases by the same amount the cost of its main instrument with which it provides liquidity and which is also the maximum it has applied in the last 23 years.
(Colombia’s 2022 GDP: market raises growth projections).
However, two members of the Issuer’s Board of Directors voted to raise 150 basis points (1.5 percentage points) to face inflation, which at the end of February exceeded 8% per year, above the goal of the monetary authority.
The manager of Banco de la República, Leonardo Villar, said that in its policy discussion the Board of Directors took into account eight aspects.
He explained that total inflation continued its upward trend and registered an annual variation of 8.01% in February, within which the food category stands out, with an annual increase of 23.3%. Inflation excluding food and regulated items increased from 2.49% in December 2021 to 4.11% annually in February.
He also assured that Russia’s invasion of Ukraine could intensify upward pressures on the international prices of some agricultural goods and inputs, energy and oil. In this context, the different measures of inflation expectations have continued to rise.
In the case of economic analysts, the monthly survey by Banco de la República showed that they expect a total inflation of 6.4% for 2022 and 3.8% for 2023.
He also commented that the available indicators show a good dynamism of the economic activity at the beginning of the year. The economic monitoring indicator (ISE) for January indicated an annual growth of 7.8%.
The manager of the Banco de la República assured that the monthly survey of industry and commerce showed that manufacturing activity presented an annual growth of 15.1% in January, and real retail sales increased by 20.9%.
GDP forecast rises.
From elsewhere, the unemployment rate fell from 15.1% in February 2021 to 12.9% in February 2022. The technical team revised its growth forecast for 2022 upwards from 4.3% to 4.7%. The foregoing implies that excess production capacity would continue to decline at a faster rate than expected.
Villar said that with the decision to raise the rate to 5%, “the monetary authority reiterates its commitment to the gradual return of inflation to the annual 3% target, for which it will continue to make the necessary decisions.”
The Minister of Finance, José Manuel Restrepo, one of the seven members of the Issuer’s Board of Directors, stressed that the decision was made due to the persistence of the price shock and that it extends not only to food, but also to inflation without food and regulated, and that the war in Ukraine is affecting some inputs for agricultural production.
He highlighted aspects such as the increase in the perspective of GDP growth, the closing of product gaps, the reduction in the need for an expansionist policy and the improvement in employment figures.
Villar, for his part, warned that the uncertainty was clear because it was thought that food inflation was beginning to subside, but the conflict in Ukraine affects the world supply of food and fertilizers, and other inputs that would hit prices in that sector. “The impacts are uncertain and could generate surprises. Towards May we could see a drop in food inflation and especially in the Colombian economy”, said the general manager of Banco de la República.
Restrepo emphasized that the Issuer came from a significant reduction in rates to contribute to the economic recovery and currently, despite the increases, they continue to be negative due to high inflation, so “they are prone to the reactivation process. Now what is sought is to avoid price increases and the blow to the purchasing power of Colombians”. “The decision was made to protect this ability of citizens,” he stressed.
Jaime Alberto Cabal, president of Fenalco, said that “although it is true that the increase in the rate is on the right track to control inflation, it will affect some sectors of the economy, such as credit in the banking sector.”
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