Available data indicates that after a historic GDP decline in Q2, recuperating activity reached a snag in Q3, as repeated extensions of the national quarantine until end-August battered the domestic inflation economy.
After three consecutive months of easing, the decline in industrial output accelerated once more in August due to lower production of travel and vehicle components.
Due to strong domestic demand, price indexing, and the depreciation of the peso, Colombia’s rising inflation rate has not yet reached its peak. This will likely result in a more restrictive monetary policy than initially anticipated, central bank board chair Leonardo Villar said on Thursday, citing recent data.
Inflation should continue to rise, but the central bank predicts it will start to drop in the next months and reach the bank’s long-term inflation target of 3% by the end of 2024, according to Villar.
More about Colombia’s inflation
Despite efforts by the central bank to chill the economy by raising the benchmark interest rate to a level of 12.75%, up from 1.75% in September 2021 when it began its upward monetary cycle, Colombia’s 12-month inflation topped 13.25% at the end of January, the highest level in nearly 24 years.
According to Villar, despite indications of a downturn in the economy, domestic demand is still strong despite price indexing on products and services brought on by last year’s inflation, a 16% increase in Colombia’s minimum wage in 2023, and increases in the cost of public services.
According to Villar, “Indexing mechanisms diminish the credibility of the (3%) target and possibly call for a more stringent monetary policy than would otherwise be required to be successful in an anti-inflation program.” According to Villar, the value of the Colombian peso has declined significantly over the past year and two years, falling more than 20% and 35% respectively, against the US dollar.
Most observers predict that the central bank’s cycle of tightening will soon come to an end. The board will decide on the interest rate again on March 31.
