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Colombia Monetary Policy April 2018

Colombia: Central Bank cuts interest rate in April

At its 27 April Board of Directors meeting, Colombia’s Central Bank (Banco de la República, BanRep) unanimously voted to cut the benchmark interest rate 25 basis points from 4.50% to 4.25%—a move that was in line with analysts’ expectations. The benchmark interest rate is now at the lowest level since July 2014.

The move was aimed at bolstering the economic recovery against a backdrop of slowing inflation. Incoming data for the first quarter suggests a tepid acceleration in growth following last year’s lackluster performance. BanRep forecasts that GDP will grow 2.7% this year, supported by healthier external demand, stronger infrastructure investment and accommodative monetary conditions. The projection would be a marked improvement from 2017’s performance, but well below potential growth.

Improved inflation dynamics gave the Bank room to maneuver in April after it had decided to stand pat in March over concerns of inflation falling too quickly. Headline inflation decreased to 3.1% in March, marginally above the midpoint of the Central Bank’s 2.0%–4.0% target range. The slowdown in inflation in Q1 was largely due to the fading of one-off price shocks in 2017. That said, BanRep noted growing upside risks to inflation, including a stronger-than-expected depreciation of the peso and higher food prices in the second half of the year, which could delay inflation’s trajectory towards the 3.0% target.

The communiqué provided little forward guidance beyond the statement that the Bank will continue to monitor price behaviors and economic activity as well as global developments and readjust any forecasts if need be. The next monetary policy meeting will be held on 31 May.

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