Available data indicates that after a historic drop in GDP in the second quarter, the recovery in activity came to a standstill in the third quarter, as repeated extensions of the national lockdown until the end of August hit the inflationary domestic economy. .
After three consecutive months of easing, the decline in industrial production accelerated once more in August due to lower production of travel and vehicle components.
Due to strong domestic demand, price indexation, and the depreciation of the peso, Colombia’s rising inflation rate has not yet peaked. This is likely to result in tighter monetary policy than initially anticipated, central bank board chairman Leonardo Villar said on Thursday, citing recent data.
Inflation should continue to rise, but the central bank expects it to start declining in the coming months and reach the bank’s long-term inflation target of 3% by the end of 2024, according to Villar.
More about inflation in Colombia
Despite the efforts of the central bank to cool the economy by raising the benchmark interest rate to a level of 12.75%, compared to 1.75% in September 2021 when its upward monetary cycle began, 12-month inflation of Colombia exceeded 13.25% at the end of January, the highest level in almost 24 years.
According to Villar, despite signs of a recession in the economy, domestic demand remains strong despite last year’s inflation-driven price indexation of goods and services, a 16% increase in the minimum wage for Colombia in 2023 and increases in the cost of public services. services.
According to Villar, “indexation mechanisms decrease the credibility of the target (3%) and possibly require a stricter monetary policy than would be necessary to be successful in an anti-inflationary program.” According to Villar, the value of the Colombian peso has declined significantly over the last year and two years, falling more than 20% and 35%, respectively, against the US dollar.
Most observers predict that the central bank’s tightening cycle will soon come to an end. The board will decide the interest rate again on March 31.
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