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Colombia Monetary Policy August 2020

Colombia: BanRep cuts policy rate to new historical low in August

On 31 August, Colombia’s Central Bank (BanRep) decided to cut the benchmark interest rate by another 25 basis points to a new historic low of 2.00%. The move came widely in line with market analysts’ expectations and was the Bank’s sixth consecutive cut, marking a total reduction of 225 basis points since March. As in the previous meeting in July, the vote was unanimous.

BanRep’s decision to cut the rate yet again reflected its commitment to further supporting the economy against the fallout from Covid-19. Underpinning the Bank’s move was the historic 15.7% annual drop in GDP recorded in the second quarter, reflecting weakened aggregate demand and excess production capacity. Against this backdrop, the Bank assessed that the impact of its monetary policy will increase in line with the gradual reopening of the economy. Moreover, in its latest forecasts presented on 3 August, it highlighted that a return to pre-pandemic levels of output is unlikely to happen in 2021.

On the inflation front, weakened demand has exerted downward pressure on prices, and July’s reading of 2.0% marked the lowest inflation rate since December 2013. Consequently, BanRep sees inflation ranging between 1.0% and 2.0% at the end of the year, while for the end of 2021 it expects inflation to range between 1.6% and 2.9%— both scenarios below its 3.0% target and providing space for further easing.

Looking ahead, the Bank’s communiqué did not include strong forward guidance; however, in the accompanying press conference Governor Juan José Echavarría hinted once again that BanRep could be getting close to the end of its loosening cycle.

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