Colombia: Rate Hike & Inflation Risks – Anif President Interview

Colombia’s central bank recently increased interest rates, a move that underscores the economic challenges facing the country amid persistent inflation, pressures stemming from a significant minimum wage hike, and growing fiscal uncertainty.

José Ignacio López, president of Anif, discussed the complexities of the central bank’s decision, warning that rates could climb above 11% or 12% and a return to lower rates isn’t expected in the medium term. The move comes as policymakers attempt to balance controlling inflation with supporting economic growth in Latin America’s fourth-largest economy.

“This was a difficult decision because of a significant tension,” López explained. “Inflation remains a central problem. We don’t yet know precisely how inflation will react in the first months of the year to the minimum wage increase, as we haven’t received the January data. However, analysts already anticipate that year-end inflation will be higher than previously expected.”

Inflation expectations have risen considerably, forcing the Banco de la República to respond, largely to those expectations. “As we receive inflation data for January and February, the March meeting will provide a clearer picture of the inflationary effect caused by the minimum wage increase.”

“There are two key elements to consider,” López stated. “First, the uncertainty surrounding the additional price pressure from the minimum wage increase. Second, even at around 9.25%, the previous rate level didn’t appear restrictive enough, given that inflation remained above 5% at the end of last year.”

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“Based on these factors, the Banco de la República’s technical analysis likely concludes that higher rates are needed, not just this increase, but additional hikes throughout the remainder of the year. We are projecting a rate of around 11%. Many analysts agree with levels above 11%, and some even suggest it could reach 12%.”

“Those rates are not visible in the near future,” López said. “I believe Colombia, in this episode, will experience inflation close to 5% or 6%, and therefore those rate levels won’t return in 2026, 2027, or even 2028.”

He explained that achieving those lower rates would require, first, inflation returning to the 3% target and, second, fiscal adjustments to reduce risk premiums, allowing the government to avoid paying such high interest rates. “Until both of those factors are in place, it will be very difficult to talk about rates like the ones you mentioned.”

“It’s important to warn of two things,” López cautioned. “First, this will undoubtedly affect everyone’s pockets, which is why the decision is so relevant. Second, the effect isn’t immediate. If the Banco de la República raises rates, it doesn’t mean Colombians will feel it the following Monday. The transmission of the monetary policy rate to households and businesses can take four, five, or even six months.”

“Over time, this will be reflected in higher interest rates for consumer loans, free investment, and mortgages. It will also be seen in the interest rates offered on savings, such as some deposits or financial instruments, where the effect may be faster. The signal is clear: saving is rewarded, and borrowing becomes more expensive, which aims to moderate consumption and reduce inflationary pressures.”

“The debate over the minimum wage is complex because it has many effects. The government has pointed out that, so far, no clear inflationary impact has been seen, and it is still early to measure it. Historically, the effects of the minimum wage on inflation become clearer starting in February, when companies have already paid January payrolls and assess how much they can absorb in costs and how much to pass on to prices.”

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“In particular, the impact is strongly felt in the services sector: education, health, food outside the home, and tourism. For those earning the minimum wage, the increase represents a significant improvement in income and can boost their consumption. However, there are also adverse effects: people who do not earn the minimum wage face higher prices and, in many cases, smaller wage increases. Overall, some sectors will pass the increase on to prices, while others will try to adjust costs, which may involve less hiring or even layoffs. Therefore, the effect of the minimum wage will be reflected in both inflation and employment.”

“Before the minimum wage increase, our projection was close to 4%. Today, we are closer to 6%. Our specific projection is 5.8%, although some analysts warn it could even exceed 6%.”

“The de-indexing of housing generates a lot of concern. The indexing to the minimum wage wasn’t arbitrary: construction costs depend largely on labor, often paid at the minimum wage.”

“With such a sharp increase in the minimum wage, construction costs are rising. If now indexed only to inflation, the caps may not reflect that higher cost and make the supply of social housing unviable. In a context where there are already problems with subsidies and buyer withdrawals, this measure could exacerbate the lack of supply.”

“Anif has warned about the impact of a decree that would limit investments of pension savings abroad. We are talking about a possible 24% drop in savings. The central message is that diversification is essential in long-term savings portfolios, such as pension funds. Today, funds invest part of the savings in international markets, such as U.S. equities, which allows them to capture significant returns, for example, from technology companies. The draft decree goes against that principle.”

“We did a hypothetical exercise: a young person who starts contributing today and does so for 25 years. By restricting diversification, lower accumulated returns could translate into a fall in final savings of around 24%. It may seem small in the short term, but in the long term it is a material difference. World Bank studies show that up to 1.4 or 1.6 percentage points of returns could be lost by reversing diversification. This implies lower savings and lower pensions, and even greater future fiscal pressure on the government.”

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“Yes, it changes because the system is modified. With the new scheme, a significant portion of contributions goes to a pay-as-you-go pillar, which implies less individual savings. Specific calculations would be needed depending on income levels and the final design of the system. These are sensitive exercises that depend on whether the reform finally comes into force.”

“The government has made sophisticated operations to seek savings, and in some cases it achieved them thanks to very low rates in Swiss francs. The risk is that if the Swiss franc appreciates against the dollar or the euro, the savings from low rates could be lost when the principal is repaid. If the currency strengthens, the government will have to allocate more resources to meet its obligations. We don’t know for sure if there was a hedging strategy against that risk, so we are attentive to the financial plan including clear information about these exchange rate risks.”

“Trade wars always generate losses for both sides. Ecuador loses and Colombia loses. Trade retaliation usually isn’t in the best interest of countries. Sectors such as vehicles, pharmaceuticals, chemicals, and oils, which have Ecuador as an important destination, will be affected. The desirable outcome is that this situation is resolved through diplomatic channels and not with a disruption of trade.”