Inflation has dropped for two consecutive months in Colombia and, nevertheless, by May it reached 12.4% per year, which does not completely relieve analysts. The Banco de la República, for its part, will meet next Friday to define the next step in its interest rate intervention strategy. Two macroeconomic variables that go closely hand in hand: the set of monetary policies chosen by the central bank to cool the increase in the cost of living has focused on raising the price of money from the 2.75% registered in June 2020 up to a dizzying current 13.25%. Several experts predict that the Colombian issuer, in line with the latest decisions of the US Federal Reserve, will maintain the current ceiling.
But even so, doubts fly over when making projections. The Fitch rating agency has indicated, for example, that inflation in Colombia continues to be one of the highest among the main Latin American economies and qualifies as uncertain the scope of the policies in reducing prices. “Part of this lag,” explains Javier Mejía, an academic from Stanford University, “is explained by the fact that countries like Brazil and Chile began to raise interest rates a few weeks before Colombia. Therefore, if one maps the indicators, it takes us longer to lower inflation.”
He also adds an element that, in his opinion, has gone sideways in recent analyses: “The prices that have fallen, in general, have been those of food. Also those of the productive chain. But inflation in services, although it has been lower than average, has increased its growth rate. This is worrying because it is not associated with value chains in the world, nor with climate issues, but with inherent factors such as the expectations of agents with new increases in the minimum wage, or that hiring becomes more complex with the labor reform.
Since the arrival of the leftist Gustavo Petro to the Government, in August 2022, an important part of the economic projections have gone through the ideological sieve of economic sectors that do not conjugate with his political project. At the head of the Finance portfolio, however, have been two ministers with sufficient credentials to balance the weight of the reformist projects of the ruling party with the watchful eye of the international environment. Eduardo Lora, an associate researcher at Harvard University, points out that the path chosen by former minister José Antonio Ocampo, and his successor Ricardo Bonilla, has even been somewhat cautious in terms of monetary policy: “There have been insufficient increases . We are hardly having an intervention interest rate (13.25%) higher than inflation (12.4%)”. At this rate, in his opinion, “not much is being done to rapidly change the rate of inflation and it will take longer than expected.” A path that, for the rest, he does not criticize either because he understands that the objective is to avoid a very drastic dry brake that affects, for example, employment, makes loans more expensive or impacts the already tempered real estate sector.
But in Lora’s opinion, the big issue to follow is not inflation. From his point of view, it is satisfying that the economy has grown by a very acceptable 3% during the first quarter of this year. “It is the trend growth of our economy under normal conditions. Growth, for now, has been absolutely normal”. Although it is true that in April there was a decrease of 0.78% with respect to the same from last year, according to the Colombian Economy Monitoring Index, Lora takes weight away from the measurement because it is a quick indicator that makes a approximate and partial calculation: “There are many economists who want, due to ideological bias, to confirm their political prejudices with incomplete data.”
For Sergio Clavijo, professor of Economics at the Universidad de los Andes, the general picture is complex because “excess demand that came from behind is mixed with some supply shocks triggered by the Russian invasion of Ukraine, but that today we already see that they have a life of their own in Colombia in terms of energy and the cost of the basket”. What could be the outlook for the second half of this year? Eduardo Lora is not so pessimistic, but he does point out that an expansive fiscal policy should be promoted to activate public spending: “With the tax reform, more money has been collected. They just passed a budget addition. But if something has slowed down the economy, it is the administrative incapacity of this government. The delay in projects and public works denotes an evident inability to execute”.
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For weeks there has been an unusual unanimity among economists regarding the Government’s success in raising the price of gasoline from 12,000 pesos per gallon to around 16,000 by the end of this year. This is an attempt to reduce the fiscal deficit by about 1.5 basic points of GDP, materialized in the fuel fund that acts in practice as a subsidy. A measure that should affect one of the items that has pushed the inflation rate upwards. “Something is going to help. But I am concerned that the diesel component, which is the one with the highest volume of consumption, has not yet been complemented with increases, ”explains Clavijo.
With the persistent rise in food prices, which in its annual reading reaches 15%, and the threat of the El Niño phenomenon in the second half of this year, the former president of the National Association of Financial Institutions is reassessing his projections for that by September the Bank of the Republic would announce slight reductions in interest rates: “We have several challenges: credit is beginning to slow down. There is a deterioration of the portfolio. And the complications on the inflationary front turned out to be more complex than we thought.”
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