Colombia's central bank likely to maintain interest rates

Colombia's central bank is facing pressure to maintain current interest rates following the unexpected resignation of Finance Minister Diego Guevara. Guevara left his position just three months into the job, which has caused market instability. The Colombian peso dropped to its weakest point since January, and analysts are reassessing expectations for an interest rate cut at the upcoming central bank meeting. Before Guevara's resignation, many had anticipated a reduction in the benchmark interest rate to 9.25%. The central bank has already lowered rates by 3.75 percentage points since December 2023. However, with Guevara's exit, experts now believe the likelihood of a rate cut has decreased. Camilo Perez from Banco de Bogota noted that prior expectations of a 60% chance for a cut have shifted significantly. Recent economic data showing stronger growth and rising inflation has also contributed to this shift. Analysts believe Guevara's departure increases fiscal risks and could impact spending decisions ahead of Colombia's election year. The board of the central bank is split on policy direction, with some members advocating for lower rates while others promote caution. Guevara's replacement, German Ávila, is expected to have a close alignment with President Gustavo Petro's spending agenda. This could lead to further increases in public spending, raising concerns among investors. Colombia is facing a fiscal deficit of 6.8% of GDP, exceeding government targets. Additionally, Petro's relationship with Congress has worsened, complicating the passage of his social reforms. As the central bank prepares for the upcoming meeting, analysts warn that increased public spending could strain Colombia's fragile fiscal position. Fitch Ratings has already downgraded the country's credit outlook, highlighting the rising fiscal risks. The market remains cautious as uncertainty grows following recent developments.