By Nelson Bocanegra, Carlos Vargas

BOGOTA (Reuters) –

Colombia's central bank on Friday cut its benchmark interest rate by 25 basis points to 9.50%, a smaller move than expected by markets, as it slowed the pace of its easing due to domestic fiscal uncertainty and decisions by its peers around the world.

All 25 analysts in a recent Reuters poll said they expected the central bank's board to deliver a 50-basis-point cut in borrowing costs.

Five of the board's seven policymakers voted for a 25-basis-point cut, one for 50 points and another for 75 points, Leonardo Villar, the board's director, said in a press conference.

"There is room to continue to lower the interest rate," Villar told journalists, adding that the central bank is confident Colombia's inflation will converge toward its 3% target next year.

The Andean nation's 12-month inflation rate through the end of November was 5.20%.

However, the bank's technical team expects movement towards the inflation target will be slower than it previously expected due to exchange rate pressures and how they affect prices, Villar said while presenting the board's statement.

"This reduces the room for maneuver to maintain the pace of interest rate cuts," the statement said.

The economy has grown 1.6% through September compared to the same period in 2023, and the labor market has remained relatively stable.

"Uncertainty about the situation of public finances in Colombia has generated volatility in the exchange-rate and public debt markets," the board added.

President Gustavo Petro's leftist government has faced fiscal troubles that threaten its compliance with the country's so-called fiscal rule, which is designed to impose limits on spending to prevent deterioration of public finances.

Colombia's Congress earlier this month rejected a $2.7 billion fiscal reform proposed by the government to finance 2025 spending.

On Thursday, Colombia's Autonomous Fiscal Rule Committee said the Andean country would need to cut spending this year by 40 trillion pesos ($9.1 billion), followed by a subsequent cut of 52 trillion pesos next year.

Colombia and other emerging market nations also are keeping a wary eye on the U.S. dollar, which could be bolstered next year by potentially inflationary policies of the incoming Trump administration and a shallower Federal Reserve rate-cut path.

Colombia's central bank has cut its benchmark rate by 350 basis points since December of 2023.

($1 = 4,394.50 Colombian pesos)