Colombia Monetary Policy July 2017

Colombia

Colombia: BanRep slows pace of rate cuts, signals end of easing cycle

July 27, 2017

On 27 July, the Board of Directors of Colombia’s Central Bank, BanRep, further cut the policy rate by 25 basis points to 5.50% in what was the fifth cut in as many months. Although markets widely expected a rate cut, analysts’ views on the size of the decrease had differed. At 25 basis points, the rate cut was smaller than the 50-basis-point reduction expected by some analysts and signaled that BanRep could soon begin wrapping up the easing cycle that began late last year following a string of weak inflation reports.

Sluggish GDP growth in Q1 and above-target inflation warranted the limited rate cut. Heavily reliant on commodities, the real economy has been struggling to find its footing since the collapse of global energy prices in late 2014. Moreover, inflation has been consistently falling since peaking at a multi-year high in July 2016 as the effects of last year’s severe supply-side shocks have gradually fallen away. In fact, inflation fell to 4.0% in June and landed at the upper bound of BanRep’s target range of 3.0% plus/minus 1.0 percentage point, which silenced calls for a more significant cut.

In noting that the ex-ante real policy rate is contractionary, the Board of Directors officially struck a dovish tone and questioned the pace at which inflation is expected to converge toward the 3.0% target. More importantly, however, the Board voted 6-to-1 in favor of only a 25-basis-point rate cut—with the lone dissenter arguing to hold rates—in what was seen by analysts as the Board’s most hawkish posturing yet, a likely indication that the end of the easing cycle is within sight. Moreover, with favorable inflationary base effects set to wear off in the near term, inflation could soon edge up and eliminate the rationale for further cuts. July’s 6-to-1 vote stood in clear contrast to the three votes preceding it in which the singular debate was between slashing rates by either 25 or 50 basis points.

The next monetary policy meeting is scheduled for 31 August.

Against this backdrop, the majority of our panelists expect at least one more rate cut before year’s end. 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 4.83%.


Author:, Economist

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Colombia Monetary Policy August 2017 1

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


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