How the lower U.S. interest rate affects the Colombian economy

The U.S. Federal Reserve has just lowered its benchmark interest rate by half a percentage point to 5%. This move indicates that the Fed anticipates a decline in inflation towards 2% and a balance between employment and inflation targets.

The Fed reacted to the deteriorating labor market and upgraded its unemployment forecast from the current 4.2% to 4.4% by the end of 2024, the inflation forecast to 2.3% and the economic growth forecast to 2% for this year.

While these forecasts are encouraging, there are concerns about the drying up of excess savings and rising delinquencies, as well as a deteriorating labor market and the Fed’s reaction was the first interest rate cut in four years.

For the U.S. economy, the lower interest rate means an increase in available credit and thus a reactivation of the economy and a consequent strengthening of the labor market, which has been weakening.

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U.S. interest rate cut impacts Colombian economy

For Colombia and the world this is good news because high interest rates in the United States are a stimulus for capital to prefer investments in that country over those elsewhere.

The Colombian government has been pressuring the Central Bank to lower interest rates more drastically so that by the end of 2024 it will reach a level of around 8.5%.

According to President Petro’s statements, lower interest rates could increase the budget margin by replacing expensive debt with cheaper debt.

The concern of the Colombian economic authorities has been to reduce inflation in accordance with the recommendations of the International Monetary Fund, as this would improve the macroeconomic situation, stimulate investment and stabilize prices, which in turn would benefit the population.

However, the former director of the National Planning Department, Jorge Iván González, has been a critic of the efforts to reduce inflation with measures that contract demand, since he considers that supply factors, such as the availability of goods and services, are at the base of inflation.

From Gonzalez’s statements it can be deduced that a reduction in the interest rate does not automatically imply a reactivation, since there would be factors in the production and supply of the productive apparatus that are of great importance.

Although the decrease in the interest rate in the United States facilitates the lowering of rates in Colombia – and presumably in the next meetings of the Board of Directors of Banco de la República new lows will be presented – the demand for new credits by the producers of goods has to do to a great extent with the capacity of the market to absorb this new productive capacity.

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An entrepreneur may have credits that allow him to produce more and at lower costs in terms of capital financing, but he has to find consumers with purchasing power.

The decrease in interest rates in the United States has been received with optimism at international level and it is foreseeable that the lowering of these rates by the Central Bank will accelerate and with it, private banks will do the same.

This may be an incentive for the much requested reactivation, but everything indicates that it is necessary but not sufficient. Overcoming the obstacles to an increase in investment, an important part of which must be public, does not depend on the interest rate but on the government’s efficiency. In addition, the feeling of uncertainty, which has been pointed out for months by businessmen, may be a determining factor in the country’s economic performance.

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