People buy fruit and vegetables in the marketplace of Paloquemao (Bogotá), June 2022. Nathalia Angarita
Inflation has fallen for two consecutive months in Colombia, but still reached 12.4% a year in May, which does not entirely relieve the analysts. For its part, the Banco de la República will meet next Friday to determine the next step in its interest rate intervention strategy. Two macroeconomic variables that are closely linked: The monetary policy chosen by the central bank to curb cost-of-living growth focuses on raising the price of money from 2.75% in June 2020 to a staggering 13.25%. Several experts believe that the Colombian issuer will keep the current cap in line with the US Federal Reserve’s recent decisions.
Nevertheless, doubts prevail when it comes to forecasts. Rating agency Fitch, for example, has pointed out that inflation in Colombia remains one of the highest among major Latin American economies and that the extent of price-cutting policies is uncertain. “Part of this lag,” explains Javier Mejía, a Stanford University researcher, “can be explained by the fact that countries like Brazil and Chile started raising interest rates a few weeks before Colombia.” So when you chart the indicators, it takes time longer until we bring inflation down.”
He also adds an element that he believes has moved sideways in recent analyses: “Prices, which have fallen in general, have affected food prices.” Also those of the production chain. But service sector inflation, while below average, has increased its rate of growth. This is worrying as it is not related to either the world’s value chains or climate issues, but to inherent factors such as agents’ expectations of new minimum wage increases or that hiring staff will become more complex with labor reform.
Since left-wing Gustavo Petro took office in August 2022, an important part of economic forecasts has passed through the ideological sieve of economic sectors that do not align with his political project. However, at the helm of the finance portfolio were two ministers with sufficient qualifications to balance the weight of the ruling party’s reformist projects with the watchful eye of the international environment. Eduardo Lora, a research fellow at Harvard University, points out that the path taken by former Minister José Antonio Ocampo and his successor Ricardo Bonilla was even somewhat cautious when it came to monetary policy: “There weren’t enough hikes. We rarely have an intervention rate (13.25%) that is higher than inflation (12.4%).” At this rate, he says, “there isn’t much being done to change the inflation rate quickly and it will take longer than expected.” A path that he also does not criticize, moreover, because he understands that the aim is to avoid a very drastic brake that will affect, for example, employment, make credit more expensive or affect the already ailing real estate sector affects.
But in Lora’s opinion, inflation isn’t the big issue to follow. From his point of view, it is pleasing that the economy grew by a very pleasing 3% in the first quarter of this year. “It is the trend growth of our economy under normal conditions. Growth has been completely normal for now.” Although it is true that in April there was a 0.78% yoy decline, according to the Colombian Economic Surveillance Index, Lora takes weight off the measurement because it is a fast indicator, who makes an approximate and partial calculation: “There are many economists who, out of ideological bias, want to back up their political prejudices with incomplete data.”
For Sergio Clavijo, professor of economics at the Universidad de los Andes, the bigger picture is complex because “the overdemand that came from behind is mixed with some supply shocks that were triggered by the Russian invasion of Ukraine, which we are now dealing with already seeing ‘a life of its own in Colombia in terms of energy and cost of the basket’. What could the prospects look like for the second half of the year? Eduardo Lora is not so pessimistic, but points out that an expansionary fiscal policy should be promoted in order to activate government spending: “More money has been collected with the tax reform. You have just decided to expand your household. But if anything has slowed the economy, it’s the administrative inefficiency of this government. The delay in projects and public works indicates an apparent inability to execute.”
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For weeks there has been an unusual consensus among economists that the government has managed to raise the price of gasoline from 12,000 pesos a gallon to around 16,000 pesos by the end of this year. This is an attempt to reduce the budget deficit by about 1.5 basis points of GDP, reflected in the fuel fund, which in practice acts as a subsidy. A measure that is likely to affect one of the factors that have pushed up the inflation rate. “Something will help. But I am concerned that the diesel component, which has the highest consumption, has not yet been supplemented with increases,” explains Clavijo.
With food prices continuing to rise, reaching 15% annually, 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 reviewing his forecasts that in September the Bank of the Republic would make modest interest rate cuts announce: “We face several challenges: Lending is starting to slow down. The portfolio deteriorates. And the complications on the inflation front turned out to be more complex than we thought.”
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