Interest rates: expectations for the new issuer's board meeting

Today's meeting of the Bank of the Republic's board of directors, at which interest rates could be modified, will take place amid a further deterioration in the external outlook and the internal debate over the conditions of a fiscal deficit that has prompted a warning from the International Monetary Fund (IMF).

Although inflation has been slowly declining, analysts are divided on the direction of interest rates, which have remained unchanged at 9.5% this year.

In March, the four members of the Issuer's board of directors who voted to keep the Monetary Policy Rate (TPM) stable at 9.50%, highlighted the risks of excessive monetary easing, such as the unanchoring of inflation expectations and having to make future rate increases due to the loss of credibility and insisted that the fiscal situation affects country risk and limits the scope for action of monetary policy.

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Although the minority group made a consensus proposal to reduce the rate by 25 basis points (bp), the majority group preferred to wait, considering that the necessary conditions were not yet in place.

According to an analysis by Corficolombiana, these risks remain, and global uncertainty has significantly increased over the past month following the April 2 announcement of reciprocal U.S. tariffs, followed by retaliation from its trading partners, the postponement of some measures, and the possibility of agreements.

The trade war has already led to a deterioration in global economic growth prospects, a drop in oil prices, and an increase in risk aversion. Corfi says that for Colombia, this has translated into pressure on the exchange rate, the risk premium, and interest rates on public debt securities, highlighting the country's high vulnerability to a deteriorating international environment.

In Colombia, annual inflation slowed to 5.09% in March, from 5.28% in February, marking the resumption of the disinflationary process after four months , a condition that Banco de la República manager Leonardo Villar emphasized as necessary to reduce the TPM, says Corfi.

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But this figure would not be enough to justify a rate cut in April, as inflation expectations are rising. According to the issuer's survey of analysts, expected inflation for the end of 2025 rose from 3.91% in December to 4.59% in April. Corfi said it revised its year-end forecast to 5% (previously 4.5%).

Added to this is the continued deterioration of the fiscal balance, "reinforcing the concerns already raised by the more conservative members of the Bank of the Republic. In fact, this is compounded by the International Monetary Fund's decision to suspend the flexible credit line until the government presents a credible fiscal plan ," according to the Corfi analysis.

The Board's minority group's arguments for reducing the MPR by 50 bp focused on the need to boost economic growth in the face of the deteriorating global environment. However, recent economic activity figures have been favorable, weakening the arguments in favor of reducing the MPR.

César Pabón, executive director of Economic Research at Corfi, said that the expectation is that the board of directors of the Bank of the Republic “ will keep the Monetary Policy Rate unchanged at 9.5% at its meeting today, in a decision by a majority of four votes to three .”

See more: Have you been? This is the South American country where the Colombian peso performs best. For his part, Andrés Moreno Jaramillo, a certified financial analyst, said, "I hope they don't change the rates." According to Corfi, the external situation has adverse effects on the Colombian economy, mainly due to the drop in oil prices and the increase in risk aversion.

The interruption of the deflationary process between November and January, followed by a rebound in February , is compounded by factors such as the resurgence of tariff barriers, the deteriorating geopolitical environment, and high market volatility. These factors could generate additional exchange rate pressures, in a context in which the country's fiscal position remains vulnerable.

According to Corfi, the dollar has depreciated approximately 4.6% against other reserve currencies, but has appreciated against Latin American currencies, highlighting the latter's high vulnerability to the new global scenario. U.S. Treasury bond yields have surprisingly risen, contrary to the role they typically play as safe haven assets during periods of high risk aversion.

Furthermore, it indicates that the Colombian economy is being affected by the more than 13% drop in oil prices, to $65 per barrel for the Brent benchmark, and the increase in the country risk premium, which has generated high volatility in the local foreign exchange and public debt markets.

According to the average of the Bank of the Republic's survey of analysts, one-year expectations rose from 3.89% to 3.96%, while two-year expectations rose from 3.50% to 3.52%.

In turn, inflation expectations for the end of 2025 have increased by 68 bp since December, rising from 3.91% to 4.59%, which would imply that, for the fifth consecutive year, inflation would close above the Bank of the Republic's target.

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