(Bloomberg) — Analysts see increased odds that Colombia’s central bank will ditch the idea of an interest-rate cut at its next meeting in the wake of the finance’s minister surprise exit just three months into the job.
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The resignation of Diego Guevara, who was seen by markets as an advocate of fiscal restraint, pushed markets into a tailspin earlier this month with the peso plunging to its weakest level since January and swaps jumping.
Now, strategists are recalibrating their bets for a cut at Monday’s meeting with concerns mounting over whether Guevara’s replacement will move to rein in spending ahead of an election year.
The market had been expecting policymakers to resume its monetary easing cycle by reducing its benchmark interest rate to 9.25%. The central bank has lowered borrowing costs by 3.75 percentage points since December 2023.
“The change of minister turns those odds upside down,” said Camilo Perez, director of economic research at Banco de Bogota. “Our probability of a cut was 60%. Now, the likelihood of a hold is larger.”
Andres Pardo, head of Latam strategy at XP Investments, said he’s now expecting the central bank to keep rates unchanged in the next meeting from his previous view of a 25 basis-point cut. Although recent data showing stronger-than-expected growth and higher inflation expectations help the case for a hold, ultimately what led Pardo to change his forecast was Guevara’s exit, as it “increases fiscal risks,” he said.
Concerns over President Gustavo Petro’s handling of the budget and sticky inflation also prompted Bancolombia to revise its estimates. The bank’s analysts now expect policymakers to move the benchmark rate to 7.5% by the end of the year, a full percentage point higher than their previous call, according to a report published Tuesday.
Split Board
Central bank decisions have become harder to predict, as the board is split over those who support larger cuts and those vowing for caution.
Petro’s finance ministers, who also serve as members of the central bank’s board, have supported his position that policymakers should ease rates. Guevara will not participate in the central bank’s board meeting. German Ávila, a longtime ally of Petro, is expected to start in the role this week.
Petro, who has struggled with dwindling popularity, has publicly complained about finance ministry officials proposing spending cuts and debt payments to energy generators and other private sector companies. The change in leadership might mean less push back for the president’s spending needs.
“The question beyond the minister’s departure is the reason for it,” said Munir Jalil, Andes chief economist at BTG speaking from London as part as a visit to investors last week. “Investors are concerned because if the exit was due to the additional spending cuts the minister was proposing, it would set a bad precedent.”
Colombia posted a fiscal deficit of 6.8% of GDP last year, above the government’s target, as officials overestimated revenue and boosted public spending. Still, the finance ministry said the government stayed within the limits of the fiscal rule, which is intended to limit its ability to run up debt.
The administration has to cut at least 12 trillion pesos ($2.9 billion) spending as Petro failed to pass a tax bill to fund this year’s budget.
Negative Outlook
Petro’s relationship with Congress has deteriorated too. While the leftist administration has an ample majority in the lower house, the Senate has blocked some of his major social reforms to overhaul labor rules and the health sector. He has called for a referendum for people to decide on the topics that lawmakers rejected.
“As Petro’s term sunsets, he becomes more pressured to show results and to keep his support base active,” Sergio Guzman, director at Colombia Risk Analysis said. “This time won’t be helpful for any person in Petro’s cabinet calling for fiscal responsibility or reduction in spending.”
While the peso has advanced 7.25% against the dollar this year — as easing tariffs fears boost carry trades in Latin America — and bonds have performed similarly to emerging peers, increased public spending could deal a blow to Colombia’s fragile fiscal accounts.
Fitch Ratings already lowered the outlook on the country’s credit score to negative from stable citing the deterioration in its fiscal position and questions over whether the government would change tack.
“Since the last central bank meeting, fiscal risks have increased,” Pardo said. “Finance Minister Guevara’s resignation, along with the 2024 fiscal figures and January’s numbers, have cast further uncertainty on the outlook.”
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