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 global decisions by peers.

All 25 analysts in a recent Reuters poll anticipated a 50-basis-point cut in borrowing costs. Five of the seven board policymakers voted for a 25-basis-point cut, while one favored 50 points and another 75 points, according to Leonardo Villar, the board’s director, during a press conference.

“There is room to continue to lower the interest rate,” Villar confirmed, adding confidence that Colombia’s inflation will align with the 3% target next year. The nation’s 12-month inflation rate was recorded at 5.20% through the end of November.

However, Villar indicated that the central bank’s technical team expects slower movement toward the inflation target due to exchange rate pressures affecting prices, which diminishes the ability to maintain the pace of interest rate cuts. The board noted that the economy grew by 1.6% through September compared to the same period in 2023, with a relatively stable labor market.

“Uncertainty regarding public finances in Colombia has led to volatility in exchange-rate and public debt markets,” the board stated. President Gustavo Petro’s leftist government is facing fiscal challenges that threaten compliance with the fiscal rule meant to limit spending and safeguard public finances.

Earlier this month, Colombia’s Congress rejected a $2.7 billion fiscal reform proposal intended to finance spending for 2025. Colombia’s Autonomous Fiscal Rule Committee announced that the country needed to cut spending by 40 trillion pesos ($9.1 billion) this year, followed by 52 trillion pesos next year.

Emerging market nations like Colombia are also observing the U.S. dollar, which may be strengthened by inflationary policies from the incoming Trump administration and a gradual Federal Reserve rate-cutting path.

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

($1 = 4,394.50 Colombian pesos)