(Bloomberg) -- Colombia unexpectedly halted a series of interest rate cuts that began in 2023 as policymakers fret about the worsening fiscal outlook, a large minimum wage hike and tariff threats from US President Donald Trump.
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The central bank kept its benchmark interest rate steady at 9.5% in a split decision, Governor Leonardo Villar said after the meeting. Eight economists in a Bloomberg survey correctly predicted the move while 24 had forecast a quarter-percentage point reduction.
Five of the seven-member board backed the decision, one called for a quarter-percentage point cut, and one argued for a half-percentage point reduction. Policymakers cited “a context of fiscal uncertainty and a volatile exchange rate”, in their decision.
“External financial conditions have tended to become more restrictive with the new US government’s policies on trade, energy and migration, which could have inflationary effects,” the bank said in its statement.
The move suspends a 13-month phase of monetary easing during which the bank lowered borrowing costs by 3.75 percentage points. The decision is a blow for President Gustavo Petro, who has called for faster easing to revive sluggish economic growth.
Policymakers had already slowed the speed of rate cuts in December, citing worries about the size of the fiscal deficit.
This month a dispute over deported Colombian migrants led Trump to threaten a 25% tariff on all Colombian goods, rising to 50% a week later. The two countries managed to reach a deal to avert that, averting an economic catastrophe for the Andean nation as the US is Colombia’s biggest trade partner, buying more than 30% of its exports.
Even so, the dispute was a reminder of how quickly US trade policy can change under Trump’s administration. On Thursday, the US president rattled markets by reiterating his intention to impose tariffs on Canada and Mexico. The Colombian peso has so far been relatively unscathed by the turmoil, and is among the best-performers in emerging markets this year.
Fiscal Miss
Colombia breached its fiscal deficit limit last year, according to the autonomous committee known as CARF, which oversees the nation’s fiscal rule, or balanced-budget act.
The government suspended the fiscal rule in 2020 during the pandemic, and congress modified it in 2021. Since then, Colombia always complied with it.