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Colombia Delivers Hawkish Rate Cut as Inflation Risks Loom

(Bloomberg) -- Colombia maintained the pace of monetary policy easing with a second straight quarter-point cut to interest rates as consumer price increases remain above target and inflationary threats abound.

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The central bank cut its key rate to 12.75%, Governor Leonardo Villar told reporters in Bogota on Wednesday. Ten of 26 economists surveyed by Bloomberg correctly forecast the move, while 15 expected a half-point cut and one a cut to 12.25%. The board voted 5-2 for the 25 basis-point cut, with the minority favoring a larger half-point reduction.

Policymakers cut interest rates “in a cautious way to control the risks that a more accelerated reduction will lead to a situation in which the process has to be slowed down or even eventually reversed,” Villar said.

Colombia just last month joined Brazil, Chile, Peru and other smaller Latin American economies that have started easing monetary policy as inflation slows toward target and economic activity cools.

Annual inflation slowed for a ninth straight month to 9.28% in December, below the forecasts of all economists surveyed by Bloomberg and hitting single-digits for the first time in 18 months. Economists see an even bigger deceleration in January, with consumer prices rising 8.37% from a year ago.

Tough Disinflation

Still, the process of disinflation in Colombia may be the most fraught in the region, as price indexation and a 12% increase in the nation’s minimum wage this year pressures inflation, economists at the Institute of International Finance who correctly forecast the decision said in a note before the decision.

Colombia has experienced record-high temperatures that have sparked fierce wildfires this year amid a severe occurrence of the El Nino weather phenomenon. National weather agency forecasts indicate that the situation will intensify in February with higher temperatures and more acute drought conditions.

Stalled consumer demand may cause the economy to contract in the first quarter, but analysts surveyed by Bloomberg still expect economic growth of 1.5% this year, up from 1.1% in 2023.

President Gustavo Petro has called on the central bank accelerate the pace of monetary easing, arguing that high real interest rates lead to the appreciation of the peso that’s affecting exports.

Policymakers are expected to lower the benchmark rate to 8.25% by the end of the year, according to the central bank’s most recent survey of analysts. The board holds its next monetary policy meeting on March 22.

--With assistance from Rafael Gayol.

(Updates with board’s vote in second, central bank governor comment in third paragraph)

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