By Luis Jaime Acosta
BOGOTA (Reuters) -Colombia’s central bank held the benchmark interest rate at 9.25% on Friday, as predicted by the market, on the back of mounting fiscal uncertainty and an uptick in inflation expectations.
The decision was backed by four policymakers on the seven-member board, while one voted for a 25-basis point reduction and two for a 50-basis point cut.
The decision “maintains a cautious monetary policy stance that recognizes the new risks identified regarding inflation’s convergence to the target, while continuing to support the recovery of economic activity,” the board said in a statement.
The government’s recent suspension of the so-called fiscal rule, which imposes policy constraints to protect public coffers, and an increase in its deficit target have set off alarm bells in a market already wary of President Gustavo Petro’s policies.
The government now has a deficit target for 2025 of 7.1% of gross domestic product, an increase from the previous estimate of 5.1% of GDP.
The increase in the deficit target “poses a challenge to the sustainability of public finances and reduces the room for maneuver to ease monetary policy,” the board said.
Ratings agencies S&P and Moody’s both cited weaker fiscal performance as their reason for making one-notch downgrades to Colombia’s debt ratings on Thursday.
Finance Minister German Avila, who represents the government on the board, said he supported a 50-point cut.
“The government does not share this decision, it believes it goes against the efforts to boost economic growth,” Avila said.
The finance ministry has increased its 2025 inflation estimate to 4.5%, nearly in line with the central bank prediction of 4.4%, and well above the long-term target of 3%.
Though inflation was down more than expected in the 12 months to May, to 5.05%, the board said it has remained high because of stubborn food and services prices and will take longer than expected to fall to 3%.
The bank’s technical team raised its economic growth prediction for the year to 2.7%, from a previous 2.6%, the statement added.
A majority of analysts in a Reuters survey last week predicted the rate would hold, but foresee a cut in either July or September.
The bank board surprised the market in April with a 25 basis point cut, after a pause in a reduction cycle began in December 2023.
(Reporting by Carlos Vargas and Luis Jaime AcostaWriting by Julia Symmes CobbEditing by Frances Kerry and Diane Craft)
