The Central Bank of Colombia lowered interest rates from 13.25% in May to 13% today. It is a slight decrease of 25 basis points, but it is a long-awaited relief for the country’s economy, which has been feeling the pressure of having such a high price of money for many months.
Businessmen and government, as well as economic experts of various kinds, had been asking the issuing body for some months to start the decrease, after the increases of the last two years, but until today the heads of the issuing bank had been reluctant to start the decrease. Today’s decision, taken by a vote of five in favor and three against, took into account inflationary data, which continue to fall slowly, as well as the economic slowdown, for which the difficulties of companies and individuals in accessing credit are also to some extent responsible.
Inflation Continues to Fall
The main reason for the Central Bank‘s reluctance to lower the interest rate was its struggle to lower inflation. In this sense, the CPI for the last eight months has been decreasing, reaching 10.15% in November. The government and economists also expect to end 2023 with inflation between 9.5% and 9.8%.
Likewise, the Bank is working with the objective of bringing the CPI to 3% in the medium term, something difficult to achieve in the coming year, although it is expected that the index will continue to fall sharply. In fact, the issuing entity is working with an inflationary horizon at the end of 2024 of between 5.2% and 5.7% per year.
Also noteworthy is the positive performance of food prices, which have fallen in the last month, something that is a necessary respite for Colombian households, which have been severely punished in the last two years by significant increases in the price of basic food products.
Stemming the Economic Slowdown
With inflation on the way to a medium-term solution, the Central Bank’s priority objective now is to halt the economic slowdown that is already evident and that has brought Colombia to the brink of the feared recession. In this sense, the issuing entity has reduced the expected growth of the national economy from 1.2% to 1% at the end of this year.
Other economic data, such as the Gross Domestic Product (GDP), also do not announce a positive outlook. In this regard, a GDP of 2.8% is expected at the end of 2023, when just a year ago this variable stood at 6.2%.
Likewise, international financial data are in line with what Colombia has decided today. International markets are working with projections that point to the beginning of a cycle in which the US Federal Reserve will also lower its interest rate, which would mean an appreciation of the Colombian peso against the dollar. This scenario would favor the country’s imports, allowing a decrease in the price of many products that Colombia currently buys abroad.
Risks With the Minimum Wage
The Central Bank has also had its say on the discussion currently underway on the increase of the minimum wage in Colombia for 2024. In this regard, Leonardo Villar, manager of the entity has called for moderation, betting on an increase in line with inflation, i.e. around 10.15%.
The law in Colombia does not allow a lower increase, but the labor unions are asking for an appreciation of 18% in the negotiation, which seems difficult to achieve. Villar warned of the risks that an increase of that caliber could pose precisely for inflation, after being of special interest in the Central Bank’s decisions.
The latest date by which the minimum wage will be known is December 30.