Colombia: BanRep steps up tightening, increases policy rate 25 basis points
March 18, 2016
At its 18 March monetary policy meeting, the Central Bank (BanRep) decided to step up its tightening cycle by increasing the policy interest rate by 25 basis points to 6.50%. The decision was in line with market expectations. This hawkish move was the seventh consecutive rate hike and demonstrates BanRep’s commitment to tackling high inflation and the widening current account deficit. The minutes of the policy meeting indicate a split between members who are concerned that the recent jump in inflation could cause inflation expectations to take-off and the majority who saw a continued 25-basis-point incremental rate hike as more appropriate. Both sides, however, agree that more monetary policy tightening is needed in order anchor inflation exceptions.
The Bank stated that a weaker peso and higher food prices resulting from shortages associated with inclement weather are putting upward pressure on prices. The bank does not see inflation falling to within its 2.00%–4.00% range this year. Against a backdrop of rising prices, the widening current account deficit is becoming increasingly difficult for the country to finance. This has resulted in an external imbalance which BanRep is also attempting to alleviate with its tightening cycle. Low commodity prices have translated into a drastic slowdown in exports and, without a corresponding decrease in imports, the peso will continue to depreciate and put upward pressure on inflation. BanRep has signaled that it aims to cause a deceleration in domestic demand in order to decrease imports and ease this external imbalance.
Although BanRep’s primary concern is to anchor inflation expectations, Daniel Velandia, Chief Economist at Credicorp Capital points out, the tightening cycle will also act to correct the economy’s external imbalance. Daniel also notes that economic activity remains strong despite BanRep’s tightening cycle:
“We believe that the BanRep policy stance has been appropriate in response to a scenario of high inflation expectations in the midst of the highest inflation level in 15 years and within a context of potential disequilibria associated with a high current account deficit. In this sense, the increase in the interest rate seeks to contain inflation expectations more than to respond to temporary effects caused by the sharp depreciation of the COP and the El Niño weather phenomenon in particular. Meanwhile, the economic slowdown sought by BanRep is required in the face of a significant drop in national income following a decline in oil prices. Having said that, economic activity maintains a healthy dynamic.”
Lastly, BanRep made clear its intended policy rate path by stating that, “in order to ensure convergence of inflation to the target in 2017, and to contribute to the reduction of the current account deficit, the Board of Directors decided to continue with the path of 25 bp increases of the benchmark interest rate”. The next policy meeting is scheduled for 29 April.
Author: Robert Hill, Economist