Colombia: Central Bank confirms tight monetary policy stance with 0.25% rate hike as expected
January 29, 2016
The members of the Central Bank (BanRep) Board decided to increase the reference interest rate by 25 basis points from 5.75% to 6.00% at the Bank’s 29 January monetary policy meeting. The decision was in line with market expectations. This was the fifth consecutive time the Central Bank hiked the reference rate. The next policy meeting is scheduled for 19 February.
In its accompanying statement, BanRep mentioned that it expects external demand in 2016 to remain modest, but to be stronger than in 2015. Growth in the United States is expected to keep pace in 2016 and the Federal Reserve will likely gradually increase its benchmark rate. Meanwhile, the Eurozone should continue recovering slowly. China’s economy is now expected to grow less in 2016 than it did last year, while growth in Latin American countries should remain subdued or even negative.
Regarding the domestic economy, BanRep noted that it expects the economy to have grown around 2.7% in 2015, which represents a downward adjustment for its previous forecast of 3.0%. A deceleration in domestic demand due to ongoing adjustments to lower incomes are expected to have weighed on growth. However, looking forward, the low exchange rate is expected to stimulate exports and incentivize local consumption instead of foreign purchases, thus improving the country’s current account deficit.
In terms of price developments, BanRep pointed out that inflation in December and the average of four different measures of core inflation exceeded the Bank’s projections and remain above its target. In addition, various indicators signal that medium-term inflation expectations increased and are in the top range of the target or even above it. The main factors that are influencing these renewed inflationary pressures are nominal depreciation being passed to consumers and a soft food supply. BanRep added that, “the magnitude of the depreciation of the peso and the intensity of El Niño will slow down convergence of inflation to the target, due to its direct impact on prices and inflation expectations, as well as by the probable triggering of indexation mechanisms.”
Against this backdrop, the Bank decided to hike the reference rate for the fifth consecutive time. BanRep argued that, “higher-than-expected increases in food prices and further increases in the exchange rate, related largely to the fall in the price of oil, continue exerting inflationary pressures. At the same time, inflation expectations remain high and the risk of a slowdown in domestic demand, exceeding that which is consistent with the decline in national income, continues to be moderated.”
Author: Eric Denis , Economist