Colombia Monetary Policy August 2017

Colombia

Colombia: BanRep cuts policy rate, points to end of easing cycle

August 31, 2017

On 31 August, the Board of Directors of Colombia’s Central Bank, BanRep, decided to cut the policy rate by 25 basis points to 5.25% from 5.50%, the seventh consecutive rate cut since 2016. The move was decided by a split vote with four members voting in favor of a 25 basis-point reduction, two members voting for a steeper 50 basis-point reduction, and one member voting to hold the rate steady. The decision was in line with market expectations of a 25 basis-point cut.

The announcement follows weak economic growth and a further decline in inflation. Inflation fell again in July from 4.0% in June to 3.4%, which is within BankRep’s target range of 3.0% plus or minus 1.0 percentage point. However, inflation is expected to rise in the second half of the year due to higher food consumer prices, which could prompt the current pace of the easing cycle to slow down.

In fact, several changes in the tone of the communiqué struck a more dovish note and could be indicative of an impending halt to BanRep’s easing cycle. In particular, the Central Bank noted that data on economic activity “suggest that the slowdown of the economy has bottomed out” and that it is more optimistic about a pickup in growth during the remainder of the year. Growth in Colombia has been weak as low oil prices have dragged on household income and export growth has been lackluster. However, the depreciation of the peso against the dollar should help bolster the external sector. These conditions will relieve pressure on the Bank to continue cutting rates. In fact, in the August monetary policy report the Bank referred to the current interest rate as neutral rather than contractionary, indicating the Board now sees the rate nearer to a potential medium-term target rate.

The next monetary policy meeting will be held on 29 September.

Against this backdrop, the majority of our panelists expect the Bank to stand pat for the remainder of the year. LatinFocus Consensus Forecast panelists expect the policy rate to end 2017 at 5.24%, and to fall further in 2018 and end the year at 4.82%.


Author:, Economist

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Colombia Monetary Policy August 2017

Note: Central Bank policy rate in %.
Source: Colombia Central Bank (BanRep).


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