Colombia raises its interest rate to 7.5%, the highest increase in its history

The board of directors of Banco de la República, Colombia's central bank, voted unanimously this Thursday to raise the monetary policy interest rate from 6% to 7.5%, the largest increase in this rate in the history of the South American country.

Annual inflation reached 9.23% in April before showing a slight drop to 9.07% in May, so the bank considered it necessary to influence inflation expectations with a sharp rise in the rate.

“The decision adopted today is compatible with the strength that economic activity has been showing in recent quarters, and will contribute to positioning monetary policy more quickly on a path that reduces inflation and converges to the target in the medium term,” the institution reported in a statement.

“Going forward, the pace of monetary policy tightening will depend on new information becoming available,” the authorities added.

In response to questions from journalists, the bank's general manager, Leonardo Villar, and the Minister of Finance and Public Credit, José Manuel Restrepo, assured that the inflation suffered by Colombia is also suffered by most countries in the world.

“This increase in the strong interest rate and unprecedented in the recent history of the country, is aimed at trying to adjust inflation expectations more quickly towards the goal and that helps us avoid the need for excessive increases in this rate. in the future,” Villar said.

The target range for inflation in Colombia is between 2% and 4% per year.

The country's strong economic recovery has been surprising, Restrepo said.

“I want to emphasize that one of the very important reasons for this decision lies in the fact that the growth of the Colombian economy has surprised significantly on the upside.

This is shown in the data from the monitoring of economic activity well above forecasts”, said the Minister of Finance.

“The decisions made on the interest rate in the next meetings will be made with the best information possible at each moment, but always with the principle that the bank is committed to the inflation target, to the recovery, with a consistent inflation of 3%, considering that this is not achieved in the short term and that it necessarily implies a lag that can be long given the magnitude and number of shocks that the Colombian economy and the world economy have received,” added Villar .

The Colombian peso has depreciated 6.4% against the dollar since June 19, when Gustavo Petro won the presidential election.

On Thursday, Petro announced that former Finance Minister José Antonio Ocampo will return to that position during his administration.

Ocampo is an economist and academic, professor at Columbia University, considered to have a moderate ideology.

Annual inflation in April was the highest since 2000, driven in part by fuel prices.

Minister Restrepo announced this month that the country would gradually eliminate gasoline subsidies, which could impact inflation.

In a report published this Wednesday by the Natixis investment bank, analyst Benito Berber said: "It will be up to the Petro Administration to decide what to do with the gasoline subsidies once it assumes power on August 7."

“In 2023, we expect inflation to continue to moderate to around 4% due to lower economic growth and the normalization of supply chains.

We also expect a moderation in food and energy prices, which in addition to base effects, will help reduce annual inflationary pressures.

Inflation will not return to the 3.00% target until 2024, in our opinion," said Berber.

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