Colombia: BanRep raises policy interest rate to 7.75%
July 29, 2016
At its 29 July monetary policy meeting, the seven-member board of the Central Bank (BanRep) raised the policy interest rate from 7.50% to 7.75%, matching market expectations. BanRep has increased the rate by a cumulative 325 basis points since last September to combat inflation, which has been on the rise since mid-2015 and reached an all-time high of 8.6% in June—more than doubling the Central Bank’s 3.0% target.
Inflation has been on an upward trend due to the pass-through effect of the depreciation of the Columbian peso on consumer prices, as the drop in oil prices—Colombia’s key export—has weakened the currency drastically since last year. Adding to this, food prices were pushed up by an El Niño-induced drought in winter that hampered agricultural output, and a 45-day truck drivers’ strike, which lasted until late July. Even though the climate and the strikes represent transitory shocks to inflation, higher prices have activated indexation mechanisms, such as those applied to certain wages, which adds momentum to inflation and suggests it could persist after the shocks dissipate. BanRep said that it expects the trucker strike to have led to elevated inflation in July, but that it hopes inflation will slow thereafter due to an expected moderation in food inflation.
Regarding economic growth, BanRep expects GDP to expand at a broadly steady, but subdued, pace in Q2 and revised down Colombia’s economic outlook for this year from 2.5% to 2.3% as the impact of lower oil revenues on the domestic economy will likely be stronger than previously expected. Moreover, BanRep highlighted that the current account deficit continued to narrow in Q2 and that it is forecast to shrink this year compared to 2015. This development comes as positive news, as BanRep has sought to reduce the high current account deficit in order to lessen the country’s vulnerability to external shocks. At July’s meeting, the Bank reiterated that its monetary tightening was helping to diminish the current account deficit.
The language in the Central Bank’s accompanying statement did not exclude the possibility of another rate hike. BanRep has claimed that its decisions depend on incoming data, and, if inflation continues to increase, additional action by the Bank could be in the cards. The next meeting is scheduled for 31 August.