(Bloomberg) — Colombia’s central bank unexpectedly slowed its monetary easing campaign, aiming to shield the peso from a potential selloff amid concerns that the country cold follow Brazil in grappling with fiscal challenges.
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The seven-member board voted to lower the benchmark rate by a quarter-point to 9.5%, Governor Leonardo Villar said after their meeting Friday. The move was forecast by only one of 30 analysts surveyed by Bloomberg. All the others predicted a cut to 9.25%.
The decision was split, with five board members backing the cut of 25 basis points, one voting for 50 basis points and another for 75 basis points.
The central bank said in a statement accompanying its decision that inflation will continue to converge to the target, “but at a slower pace than forecast in October, due to pressure from a weaker currency and its impact on domestic prices.”
In the year to date, Colombia’s peso has weakened 12% against the dollar. Uncertainty about the state of public finances in Colombia has generated volatility in the foreign exchange and public debt markets, policymakers wrote in the statement.
“Fiscal angst not only in Colombia but in the region” led several board members to back a smaller rate cut, Finance Minister Diego Guevara said after the meeting. “Their reasoning was to maintain a rate that makes Colombian assets attractive.”
Guevara joined his first monetary policy meeting Friday, arguing that the central bank should have voted for a bigger rather than smaller rate cut to support Colombia’s weakening economy, even if that meant inflation taking longer to converge to target. Policymakers have lowered borrowing costs by 375 basis points since last year, including six consecutive half-point reductions before today’s quarter-point drop.
Across Latin America, central banks in Mexico, Chile, and Peru have been moderately lowering borrowing costs with quarter-point cuts, while renewed inflationary pressures and the currency’s collapse in Brazil have the country’s central bank tightening policy.
In Colombia, President Gustavo Petro’s government as well as the private sector have repeatedly called for faster easing to revive economic growth. However, uncertainty created by fiscal risks around the budget deficit, and selling pressures in local financial markets convinced a majority of board members that a smaller cut was adequate. Guevara has said he’s committed to take the actions needed to guarantee fiscal sustainability.