IN LITTLE over two years and ten months, the Banco de la República increased the reference interest rates by 11.5%, going from 1.75% in September 2020 to 13.25% until June of this year.
In that period, the Bank’s main argument was that inflation should be contained no matter what. However, in that period, the Consumer Price Index (CPI) went from 1.97% to 12.13% as of June this year.
However, since inflation has already been falling for three consecutive months, both the markets and analysts are opening the door for the Issuer to begin to loosen its monetary policy and decide to lower interest rates.
One of the analysts who is asking the Bank to lower interest rates with more insistence is the former Minister of Finance, José Antonio Ocampo, who called on the Bank of the Republic to reduce its interest rates.
Ocampo reiterated that call in an editorial column for a Bogotá newspaper. This, given the positive changes that have occurred with respect to the drop in inflation, as well as the annual increase in producer prices. In addition, due to the impact of rates on economic activity.
“It is time for the Banco de la República to start reducing its interest rates. If you use all the opportunities and reduce the rate by 25 points each time, the rate would be 12.25% at the end of the year,” Ocampo wrote in El Tiempo.
For his part, the Issuer’s manager, Leonardo Villar, believes that there could only be a possibility of studying flexibility in interest rates until after July.
Contraction
In this sense, he assured that, if interest rates are reduced with the proposal he presented, its value would “still be in contractionary terrain, that is, above expected inflation.”
He also stressed that it is important to reduce interest rates, given the decrease of more than 14 percentage points, in relation to December, in the annual increase in producer prices for domestic supply.
But it is not only the positive aspects, but also the effect of high interest rates. “It is reflected in a decrease in imports of more than 15%, in lower consumer demand according to all surveys and in a true collapse in home and car sales.”
“As a result, economic activity is being affected. In April, the activity index estimated by DANE decreased. The opinion indicators for Davivienda and Fedesarrollo show better performance in May and June. Although economic activity grew very little or not at all in the second quarter,” Ocampo wrote.
The credit
Confirming the decline in economic activity, a study by DataCrédito Experian said that the number of loans in Colombia fell 8% between January and April 2023.
In 2021 and 2022 there was a growth of 32.3%, going from 12.6 million operations to 16.7 million. But for the beginning of this year the number of credits was reduced to 15.4 million.
This reduction, explains the analysis, is due on the one hand to the increase in credit interest rates, generated by the monetary policy of the Banco de la República to increase rates to control high inflation.
However, according to expert analysis, there would be a reduction for this year. According to Credicorp Capital, interest rates would end at 10.75% in 2023. And by 2024, they would fall to 7%.
This request to the Issuer to lower interest rates has to do with the fact that the main argument for raising them is disappearing with the drop in inflation from the peak of 13.34% in March of that year, to 12.13% in June.
The door
Instead, everyone’s question is when the interest level will start to drop from 13.25%. The Minister of Finance, Ricardo Bonilla, said that, given the decrease in prices, the aforementioned rate became the ceiling and that in “two or three months maximum” the Colombian central bank can begin to lower rates.
Rather, there are some elements at play that could cause the Issuer to take more time to start lowering the cost of its main rate.
Externally, there are factors such as the possibility that the Federal Reserve (FED) in the United States will continue raising its interest rates and that, in addition, towards the end of the year there will be, in the best of cases, a slowdown. And that, with an intensification of the conflict in Ukraine with the attacks from Russia, some prices will be affected.
To this should be added the possibility that towards the end of the year the ‘El Niño’ phenomenon will be intense and affect the production and price of some foods.
The head of economic research at Davivienda Corredores, Germán Cristancho, says that the rate drop will be in December, but even so the rate will remain high.
“In the short term, the discussion of lowering rates is not easy, since core inflation continues to be high. Colombia among Latin American countries is the furthest behind in the moderation of inflation. Countries like Chile and Brazil have been more successful in bringing down inflation. Economic activity has slowed down since April and this could open a space for the Banco de las República to lower rates,” he emphasized.
For his part, Daniel Velandia, Executive Director of Research and Chief Economist of Credicorp Capital, believes that the first rate cut by Banco de la República will take place next September.
Felipe Klein, BNP Paribas economist for Latin America, expects the cost of the Issuer’s main instrument to remain at 13.25% because “the monetary policy rate is already at a sufficiently contractive level and both expectations and inflation have begun to subside.” ”. Thus, he considered that the next rate movement (of 50 basis points or 0.5%) will occur in the first quarter of 2024.
“We believe that monetary policy will have to be patient and remain in contractionary territory for longer than the consensus expects. In particular, we believe that the ‘El Niño’ phenomenon will interrupt the decline in inflation expectations towards the end of the year,” he said.
The reasons of the co-directors
In the latest decision of the Board of Directors of Banco de la República, the co-directors highlighted the reduction of close to one percentage point of total inflation.
They highlighted that core inflation stopped rising and that inflation expectations fell in a context of appreciation of the peso, despite increases in gasoline prices that pushed up the regulated item of the consumer basket.
They added that the accumulated increase of 11.5 percentage points in the policy interest rate has already been reflected in the moderation of the growth rate of aggregate demand, as revealed by the results of GDP for the first quarter and of the ISE for April. .
They noted that the adjustment in domestic demand, to a greater extent than that of production levels, has allowed a reduction in the current account deficit. Likewise, they pointed out a decrease in the dynamism of consumer credit, which went from growing at rates close to 23% per year in the third quarter of 2022 to growth of less than 7% per year in mid-June, and 0% if the variation is measured in the margin of the last thirteen weeks.