August 31, 2016
At its 31 August monetary policy meeting, the seven-member board of the Central Bank (BanRep) held its policy interest rate steady at 7.75%, bringing a year-long tightening cycle to an end. The near-unanimous decision aims to deal with anemic economic growth and stubbornly high inflation. BanRep has increased the rate by a cumulative 325 basis points since August 2015 to combat inflation, which has been on the rise since mid-2015 and reached a record high of 9.0% in July—triple the Central Bank’s 3.0% target.
According to BanRep, the constant increase in inflation is due to the Colombian peso’s depreciation pass-through on consumer prices. The peso is closely linked to the price of hydrocarbons, which make up nearly half of Colombian exports and saw their value tumble after last year’s collapse in oil prices. Adding to this situation, food prices were pushed up by an El Niño-induced drought in winter that hindered agricultural output and a 45-day truck drivers’ strike, which lasted until late July. Even though El Niño and the strike represent temporary shocks to inflation, higher prices have activated indexation mechanisms, such as those applied to certain wages, which has contributed to the persistence of inflation. However, the Bank expects food prices to decrease in the coming months as food production recovers and believes that inflation will fall to within its target range in 2017.
Regarding economic growth, the Central Bank highlighted that the economy grew just 2.0% year-on-year in Q2, well below their expectations of a 2.6% expansion. Q2’s disappointing figure, combined with preliminary data for Q3, suggest a downward bias in the growth projection for 2016. On the positive side, the current account deficit continued to narrow in Q2, which should help lessen the country’s vulnerability to external shocks. Likewise, Colombia’s terms of trade have improved although they are still below 2015’s average.
In its press release, BanRep stated that it will continue to monitor the country’s macroeconomic stability and that it remains committed to keeping both inflation and expectations anchored to their target range. The next meeting is scheduled for 30 September.
Author: Luis Lopez Vivas, Economist