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Colombia's Central Bank Slashes Interest Rate for First Time in Over Three Years

Colombia's Central Bank Slashes Interest Rate for First Time in Over Three Years

Colombia's Central Bank Takes Bold Action Amid Economic Woes

In a significant move, Colombia's central bank on Tuesday lowered the benchmark interest rate, marking its first reduction in over three years. This decision is a strategy to stimulate an economy seriously impacted by specific inflationary pressures. The interest rate underwent a cut of 25 basis points, falling to 13%, in a decision supported by five out of seven policymakers. The previous rate cut happened back in September 2020.

Growth Forecast Adjusted and Inflation Continues Its Downward Journey

Alongside the rate adjustment, the central bank also revised its growth forecast for 2023, lowering it from 1.2% to 1%. Despite increasing prices for energy and fuel, inflation has maintained a downward trend over the past eight months, standing at 10.15% in November as reported by the board. However, this current inflation rate still significantly exceeds the bank's long-term goal of 3%.

Declining Food Prices and Mixed Inflation Expectations

The bank's statement highlighted the noticeable decrease in food prices and pointed out that anticipation concerning inflationary trends for the upcoming year are varied. However, there are persistent concerns about the declining pace of economic growth.

Stressed Economic Conditions and Wage Concerns

Ricardo Bonilla, the Finance Minister representing the government on the board, underscored the importance of their decision in an environment of evident economic slowdown and lingering concerns. The decision occurred one day after the statistics agency reported a 0.41% year-on-year contraction in the gross domestic product for October, marking the third consecutive monthly downturn. Furthermore, debates continue over the extent of the incremental increase in the minimum wage set for 2024.

Analysts Assert Potential Influences

Board chief Leonardo Villar confirmed that the economy's momentum is losing speed. Analysts have flagged that both the rise in fuel prices and the proposed increase in the minimum wage could sway next year's inflation rate. The board urges caution in the decision-making process relating to adjustments of the minimum wage to ensure it doesn't significantly surpass the consumer price index's annual variation in 2023.

Surveys Predict Various Future Scenarios

Last week, a Reuters poll of 20 financial experts revealed that six predicted the lowering of the rate to 13%. On the other hand, five were in favor of a bigger cut of 50 basis points, while nine expected the rate to stay at 13.25%, the highest in 24 years. The survey projects the interest rate to hit 8% by the close of next year, followed by a further decline to 5.5% in 2025.

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